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A High Yield Play on Lower Corn Yields

The U.S. cut its corn-harvest estimate 12 percent and said inventories next year will be smaller than fore cast in June as the worst Midwest drought since 1988 erodes prospects for a record crop.  With the increase in corn prices, companies using corn will be hit with higher expenses while those increasing corn yields will prosper.  The rise in corn prices will affect food prices as corn is a primary food source for livestock.  Investors must be wary of how the increase in corn prices may affect their portfolios.

Crop conditions as of July were the worst for that date since the drought of 1988, government data show.  Tighter supplies than expected may boost costs for ethanol makers including Archer Daniels Midland Co. (ADM) and several meat producers.  Investors are lightening up on their protein diets, unloading shares of Sanderson Farms Inc. (SAFM), Pilgrim’s Pride Corp. (PPC) and Tyson Foods Inc. (TSN) over the past month amid a swift rise in futures prices for feed grains.

Fertilizer stocks are moving higher after the government reported greater than expected damage to corn crops.  Shares of fertilizer makers CF Industries (CF), Potash (POT) and Mosaic (MOS) have already made a significant move up in price.  In addition, one fertilizer stock to watch was an IPO in November 2011 that pays a high dividend yield.

Rentech Nitrogen (RNF) was formed by Rentech, Inc. to own, operate and expand its nitrogen fertilizer business.  Rentech Nitrogen’s assets consist of a nitrogen fertilizer facility located in East Dubuque, Illinois, owned by Rentech Nitrogen, LLC, the operating subsidiary of Rentech Nitrogen Partners, L.P.  The facility is located in the Mid Corn Belt in the northwestern corner of Illinois, adjacent to the Iowa and Wisconsin state lines, and produces primarily anhydrous ammonia and urea ammonium nitrate solution, using natural gas as its primary feedstock, for sale to customers in the Mid Corn Belt.

Rentech Nitrogen Partners, L.P. (RNF) announced today the declaration of a cash distribution of $1.17 per common unit for the second quarter of 2012. The distribution is payable on August 14, 2012 to holders of record as of August 7, 2012.  RNF is trading at $30.56 at the time of this writing.

This will be the second cash distribution paid by Rentech Nitrogen since its initial public offering (IPO) in November 2011, and will result in cumulative cash distributions since the IPO of $2.23 per common unit.  Of that amount, $1.70 relates to the twelve months ending December 31, 2012, and $0.53 relates to the period from the IPO through December 31, 2011.

Rentech Nitrogen believes that it is well positioned to exceed its forecast of cash available for distribution in the range of $2.86 per common unit for the twelve months ending December 31, 2012.  RNF is trading at $30.56 at the time of this writing.  Based on $2.86 in dividends, RNF has a dividend yield of 9.36%.  Based on the current year EPS, RNF trades at a PE of 10.8.  RNF has a Forward EPS Long Term Growth (3-5 Yrs) of 12%.

The Partnership will provide details on its guidance during its previously announced conference call to discuss financial results for its 2012 second quarter on August 3, 2012.

Revenues for the three months ended March 31, 2012 were $38.5 million, as compared to$23.9 million for the comparable period in the prior year. Current period revenues benefited from higher sales prices caused by a combination of low levels of grain and fertilizer inventories and expectations of higher corn acreage in 2012.  An early spring application window, strong nitrogen demand, strong plant production and on-stream time, and low natural gas prices contributed to the exceptional results for RNF.  During the quarter, RNF operated the plant at maximum capacity to take advantage of the strong market dynamics.

RNF continues to benefit from relatively low North American natural gas prices, which, when coupled with strong nitrogen product prices, resulted in gross profit margin of 59% for the period, up from 43% for the comparable period in the prior year.

The New Dividend Growth Superstar Series

It is easy to just run a stock screen looking for good dividend stocks and find a few worth evaluating for addition to your portfolio.  Many investors have had success by buying dividend stocks and compounding their returns over time.  This will generally bring you back to the classic blue chip stocks.  These stocks are consistent and steady performers.  However, did you ever wonder what these stocks produced when they were younger such as 25 years ago?  Yeah, these types of stocks made many millionaires.

So if you want to follow a similar path, where would you start today?  I have an idea to identify stocks that have performed well in the past 5 years.  I am looking at 5-year growth rates in revenue, EPS, cash flow and book value.  The real superstar stocks will dominate these metrics and have cash to share with owners.  To make my list, each stock must have at least a 10% 5-year growth rate in each metric and payout a rising dividend during this period.  It is these stocks that I call “The New Dividend Superstars.”  These are stocks that you may not think of as dividend stocks. But in a few years your yield on cost will be much higher than you realize.  Lastly, you will avoid the dividend bubble in current high yield stocks.  It will take several posts to discuss stocks on this list.  So let’s get started.

CF Industries Holdings, Inc. (CF) through its subsidiary, CF Industries, Inc., manufactures and distributes nitrogen and phosphate fertilizer products, serving agricultural and industrial customers worldwide.  CF has been on a ride with a 31% price increase year to date.  CF has a very low yield of 0.84% but it has a 5-year dividend growth rate of 83%.  As for the metrics, CF has a 5-year EPS growth rate of 105% with a 5-year cash flow growth of 72%.  Revenue growth over 5 years was 25% and book value 37%.  Fertilizer stocks are moving higher after the government reported greater than expected damage to corn crops.  This should help to sustain the growth of CF in the coming quarters.

AZZ Incorporated (AZZ) is a manufacturer of electrical products and a provider of galvanizing services.  AZZ is up 43% year to date following great Q1 earnings.  The company posted Q1 earnings of $1.26 per share, compared with the prior year period’s $0.75. Excluding non operational income and expense items, earnings per share was $1.02. The Capital IQ consensus estimate was $0.81 EPS.  Revenues were $127.1 million, compared with $114.33 in the same quarter last year. Analysts were looking for $122.82 million in revenues.  AZZ declared a 2 for 1 stock split of the Company’s Common Stock in the form of a 100% stock dividend, payable on July 30, 2012 to shareholders of record as of July 16, 2012.

AZZ is a small stock with a market cap of only $821 million.  AZZ has a 5-year EPS growth rate of 12% with a 5-year cash flow growth of 18%.  Revenue growth over 5 years was 12.5% and book value 19%.  AZZ has a dividend yield of 1.57% that has a 5-year dividend growth rate of 67%.  AZZ has a payout ratio of 26%.

Herbalife (HLF) is a global nutrition company that sells weight-management, nutrition, and personal care products intended to support a healthy lifestyle.  HLF got hammered in May on speculation that David Einhorn of Greenlight Capital would short the stock.  This never happened when Greenlight released their new positions.  This creates a great opportunity to buy this growth stock $20 cheaper with a higher dividend yield.  HLF reported first quarter net sales of $964.2 million, a 21 percent increase driven by a 24 percent increase in volume points compared to the prior year period. For the same period, the company reported net income of $108.2 million, or $0.88 per diluted share, reflecting an increase of 22 percent and 24 percent respectively compared to the adjusted first quarter 2011 net income of $88.7 million and $0.71 per diluted share.

HLF recently received seven new retail licenses to expand sales in China.  HLF plans to buy back nearly $428 million of its own shares after seeing its stock drop to complete a $1 million buyback plan.  HLF is a mid cap stock with a market cap of $5.58 billion.  HLF has a 5-year EPS growth rate of 28% with a 5-year cash flow growth of 22.8%.  Revenue growth over 5 years was 13% and book value 14%.  HLF has a dividend yield of 2.43% that has a 5-year dividend growth rate of 64%.  HLF has a payout ratio of 25%.

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