This week’s Blue Harbinger Weekly is a continuation of our public report titled “Top 6 Big-Yield Fertilizers Worth Considering,” except in this members-only version we disclose and review the Top 2. In addition, we provide a brief update on our utility stock holding, news regarding its upcoming merger, and our expected double digit return over the next 9 months (or sooner).
As we wrote in our public report, If you are a contrarian investor and you like big yield then the fertilizer companies are worth considering. Here is our complete ranking of the Top 6, including the Top 2 members-only names:
Here are the details for the Top 2...
2. Terra Nitrogen (5.6% Yield)
Terra Nitrogen is a producer of nitrogen fertilizer, and it’s organized as a variable distribution MLP (basically it receives tax advantages if it pays out most of its profits as distributions to its unitholders). Unlike many of its peers, Terra Nitrogen has actually delivered positive returns over the last year. It has a variety of positive things going for it such as no debt and a large distribution payout that was just raised in the most recent quarter. It also benefits from very high margins and strong returns on its invested capital.
However, two important consideration before investing in Terra Nitrogen are 1) its market price is very volatile, particularly as its one main fertilizer line is nitrogen-based and is subject to swings in natural gas input prices. And 2) Because it’s organized as an MLP, it may be inappropriate to own in a non-taxable account such as an IRA (you should consult with your broker before purchasing).
1. CVR Partners (9.9% Yield)
We like CVR Partners (UAN) because we believe the market is overly pessimistic, and the company has better days ahead. Not only will it benefit as the overall global population grows, but it will benefit as it rebounds from its current low point in its business cycle. We believe the recent price decline makes now an attractive opportunity for income-focused investors to pick up this big 9.9% variable distribution yield. Plus, its price should rise as business picks up, or from a potential future acquisition (a bigger company may eventually buy UAN at a premium) as the industry consolidates. This investment does not come without volatility, but it does offer a big quarterly distribution, and big long-term price appreciation potential. You can read our full report on CVR Partners here:
Westar Energy (WR) Update:
We own Westar Energy in both our Income Equity and Disciplined Growth strategies, and as long as the proposed merger with Great Plains Energy closes (it’s expected to close by next spring) shareholders have essentially locked in a 13% gain over the next 9 months.
As you may recall, Westar has agreed to be acquired by Great Plains Energy for a cash and stock transaction valuing the equity at $8.6 billion (here is the press release). Shareholders will receive $51 in cash and $9 in Great Plains stock for each share of Westar (Westar currently trades at $53.98). The deal is expected to close in the Spring of 2017. And as long as the deal closes, that means Westar shareholders have locked in approximately an 11.1% gain between now and the deal closing (plus they continue to receive Westar’s 2.8% dividend payments until the deal closes).
New was released just last week that the justice department was reviewing the transaction for possible anti-trust concerns (here is more information). However, given the relatively small size of this transaction, it seems unlikely the justice department will prevent the deal, and the market largely agrees as the stock price was down only 3% last week on the news. And if for some reason the justice department does block the deal, then shareholders are left holding Westar Energy- a highly profitable company that we like regardless of the proposed transaction (plus it pays a nice dividend). We continue to own Westar Energy.