CF Industries Is A Bargain; Their High Dividend Is Safe – Seeking Alpha

Shares of CF Industries (NYSE:CF) have dropped substantially over the past two years. The drop in share price can be attributed mostly to fertilizer prices decreasing substantially and input costs slightly increasing. However, markets have over exaggerated this through in the fertilizer price cycle and have left CF Industry shares undervalued with a high and safe 4% dividend.

CF data by YCharts

CF Industries' Balance Sheet and Cash Flow Make its Dividend Safe

CF Industries has positioned itself very well to survive the trough in the fertilizer price cycle and will easily be able to meet their planned capital expenditures, interest expense, and current dividend. After examining their Q1 Earnings Release, as of March 31, 2017, they had roughly $1.3 billion in cash and cash equivalents. On June 15, 2017, CF told investors that they received an $815 million tax refund. Therefore, I estimate they have around $2 billion in cash and cash equivalents. CF's current ratio and cash ratio show that they are in an excellent liquidity position to meet their current obligations.

CF Cash Ratio (Annual) data by YCharts

CF's operating cash flow provided $627 million in cash over the last 12 months. The company expects to have $400-450 million in capital expenditures in 2017. The company distributed $128 million to its non-controlling interest last year. Assuming that this year they have the same in operating cash flow, distribute the same to the non-controlling interest, and pay the same amount in common dividends, I estimate the company will have a decrease in cash of approximately $206 million. This would leave them with around $1.8 billion in cash starting 2018.

One last thing to consider is their solvency. According to their most recent 10Q, CF has $800 million in debt coming due in 2018 which they plan to pay back completely with cash. The next debt coming due would be in 2020 which is shown below. This leaves CF Industries with plenty of cash to continue paying their dividend while waiting for fertilizer prices to rebound.

Source: CF Industries 2017 First Quarter Form 10Q

CF Industry Has Positioned Itself for a Fertilizer Price Rebound

As we approach the bottom of the fertilizer price cycle, CF has positioned itself nicely by greatly increasing its fertilizer production capacity. According to their CEO Tony Will in their 2016 full year earnings release, capacity has increased 25% year over year. As you can see on the website Farm Futures, the price of fertilizers CF industries sells have dropped significantly over the last 2 years. Fortunately, as one of the lowest cost producers with access to cheap American natural gas, CF Industries will thrive as higher cost producers go bankrupt or shut down. Also as capital intensive as the business is, the company can still claim tax losses through depreciation and amortization to supplement cash flow.

Valuation Based on Changing Fertilizer Prices

When considering that fertilizer prices have the ability to rebound substantially from their recent bottoms, it appears that CF may be quite undervalued. The company has leveraged capacity in a way that when prices do rebound they will profit massively. As low-cost producers are forced out of the market, eventually supply will decrease and prices will rebound. If prices increase back to their 2015 levels, CF will be trading at a forward P/E of only 4.89. See the table I created below.

Source: Jones, Brock "Expected Net Income of CF Industries Based on Increased Selling Price"

Conclusion

It appears that CF Industries is not likely to cut their dividend and can safely pay it. They have plenty of funds to meet upcoming debt obligations, pay for capital expenditures, and reward shareholders with their 4% dividend yield. Although fertilizer prices may not rebound quickly, when they do CF is positioned very nicely to profit from it and likely be valued much higher. CF Industries appears to be a stock you can hold onto for the long run.

Disclosure: I am/we are long CF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long CF call options.

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CF Industries Is A Bargain; Their High Dividend Is Safe - Seeking Alpha