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In a world of historically low interest rates, 5% yields are hard to find. Investors used to be able to count on fixed income investments like bonds for that kind of yield, but those days are long gone. What’s worse is that bank savings products like certificates of deposit pay even less.
The good news is that for investors willing to wade into the waters of the stock market, there are some stocks that pay 5% dividends and have a good chance of sustaining those payouts going forward. CF Industries (NYSE: CF), a major U.S. fertilizer producer, has a 5.3% dividend yield.
The company has seen its share of struggles this year. Its stock price has dropped, due to a steep decline in fertilizer prices, which has elevated its dividend yield. And, it is true that abnormally high yields can be a sign of trouble.
But for investors that can stomach some uncertainty, CF could be a high-yield stock worth considering.
Turnaround Takes Shape
CF has been hit hard by a global fertilizer supply glut, brought on by a flood of cheap imports from China. The rise in global production caused prices to fall significantly. For example, in 2015 CF’s average realized price per ton of ammonia and granular urea fertilizer dropped 4% and 14%, respectively, from the prior year.
Investors have become very pessimistic about CF’s chances, and the stock has fallen by nearly half over the past one year.
The good news is that the company has remained profitable through the downturn, by focusing on cost reductions. And, one of the benefits of the drop in commodity prices is that natural gas, a key input cost, has fallen as well.
Another key factor helping CF remain financially stable is that nitrogen fertilizer is a basic material used in the agriculture industry. Food production is a basic human need, and since demand for food isn’t going away any time soon, CF still generates earnings each year.
Last year, CF generated $2 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). This is a relatively strong performance, given the difficult pricing environment, and the turnaround could advance in 2017 and beyond.
Why CF Industries Dividend Could Be Sustainable
Going forward, EBITDA should increase substantially. The first way to achieve that would be a recovery in fertilizer prices. It is impossible to predict prices, but CF management has expressed confidence that suppliers in China producing at a loss will be pushed out of the market eventually.
But, even if pricing remains weak, CF will at least benefit from lower capital expenditure requirements. That’s because the company is nearing the end of a major expansion project at two of its largest production facilities.
CF spent $2.5 billion in capital expenditures last year due to the North American expansion project. But management expects capital spending to decrease significantly over the next several years, now that the project is nearing completion. For example, CF expects to spend $2 billion to $2.2 billion this year, and just $450 million next year.
This would go a long way in generating enough cash flow to sustain the CF Industries dividend payout. Starting next year, it is highly possible that CF’s earnings will grow, thanks to a possible recovery in fertilizer prices and significant cost reductions. This makes CF a very attractive stock for value investors.
Turnaround Play for Value and Income
After a tough year, CF is on the rebound. It has a long way to go before its turnaround is complete, but there are signs that a recovery is underway.
In the meantime, investors are paid well to wait with the 5.3% CF Industries dividend yield. And, the stock is cheap. CF stock trades for approximately 4.4 times 2015 adjusted EBIDTA.
CF is likely to be volatile as the turnaround progresses, and the stock isn’t for the risk-averse. But for investors looking for value and income, CF could be a worthwhile turnaround play.
Disclosure: The author is personally long CF.