Terra Nitrogen's dividend increased 255% this quarter. What's up with that?

Terra Nitrogen (TNH) reported stellar earnings today and the company announced a much higher dividend payment for the first quarter.  But will that much higher dividend payment be the new norm for Terra Nitrogen.  The RTTNews article below makes it sound like TNH will up their quarterly dividend from $1.36 per common unit (share) to $4.84 per common unit.  That is an unbelievable 255% dividend rate increase.

Terra Nitrogen Co. L.P. (TNH: News ) said Thursday its first-quarter profit rose from the prior year, due to higher ammonia and urea ammonium nitrate selling prices and volumes.  For the quarter, net earnings to common units grew to $$66.6 million or $3.60 per common unit from $$32.9 million or $1.78 per common unit a year earlier.  Results for the quarter included an unrealized non-cash mark-to-market gain on natural gas derivatives of $1.2 million.  Net sales for quarter were $196.0 million, up from $118.8 million last year. This increase was due to higher ammonia and urea ammonium nitrate selling prices and volumes.  The increase in prices, the company said, resulted from an improved global supply/demand balance for nitrogen products and higher expected crop plantings in North America.  Additionally, the company said its Board has declared a quarterly cash distribution of $4.84 per common limited partnership unit payable May 27 to holders of May 16.  Terra Nitrogen Co. L.P. produces and distributes nitrogen fertilizer products to agricultural and industrial customers.

Link to original article: http://www.rttnews.com/Content/QuickFacts.aspx?Node=B1&Id=1616708

That sounded too good to be true so I did a little digging.  I went searching for the company's earnings press release for today to see if Terra Nitrogen said it was increasing their quarterly dividend to $4.84.  Morningstar.com has the company's short press release: http://news.morningstar.com/all/ViewNews.aspx?article=/BW/20110505007332_univ.xml

In TNH's press release on Morningstar I read the following concerning the dividend increase:

TNCLP reported today that its Board of Directors has declared a cash distribution for the quarter ended March 31, 2011, of $4.84 per common limited partnership unit payable May 27, 2011, to holders of record as of May 16, 2011.

Cash distributions depend on TNCLP's earnings, which can be affected by nitrogen fertilizer selling prices, natural gas costs, seasonal demand, production levels and weather, as well as cash requirements for working capital needs and capital expenditures. Cash distributions per limited partnership unit also vary based on increasing amounts allocable to the General Partner when cumulative distributions exceed targeted levels.

Announced distributions for the first quarter of 2011 exceed distributions in the previous and year-ago quarters due to higher net earnings allocable to common units and a one-time working capital benefit associated with implementing the previously announced new operating agreement with CF Industries. With this distribution, TNCLP cumulative distributions continue to exceed targeted levels.

That doesn't sound like they expect to keep the dividend payments at $4.84 per common unit per quarter in the future.  The company only earned $3.60 per common unit.  That makes this quarter's dividend payout ratio 134% and we all know that isn't sustainable.  But this will increase the yield for the year.

I have calculated in the past that Terra Nitrogen has a five year average earning power of $9.97 per common unit.  If the company can match this quarters results for the remainder of the year, then that average should be moving up at the end of the year.  The company is currently trading at 10.9 times it five year average earnings.  Any amount below 12 times average earnings is value territory.

The stock closed at $108.71 today, but it only has a book value of $11.35.  That sort of bothers me, but I haven't done the detailed analysis of their balance sheet yet justify my concern.  I like very low price to book values and this one is closer to 10.  I'm going to keep my eye on Terra Nitrogen to see if these earnings are just the result of higher prices and seasonality.  It makes sense to me that farmers by their fertilizers in the 1st quarter of the year.

I'm putting this stock on my watch list.

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!