One Huge Dividend Play

 

That business is CVR Partners (NYSE:UAN  ) , a limited partnership that held its IPO less than two weeks ago. The limited partnership was created by parentCVR Energy, which still retains more than a 70% interest in this $540 million company.

CVR Partners owns and operates a nitrogen fertilizer business based in Coffeyville, Kansas. According to the company, it's the only nitrogen fertilizer manufacturing operation in North America that uses a petroleum coke gasification process to produce its fertilizer. The company is moving ahead with a two-year plant expansion that will increase its production of urea ammonium nitrate by 50% per year. The company also produces lower-margin ammonia.

CVR Partners sells its products primarily in the higher-margin agricultural market, whereas competitors such as PotashCorp (NYSE: POT  ) , Agrium, and Yara make substantial sales of non-nitrogen fertilizers to the lower-margin industrial sector. Because nitrogen must be added to crops each year, such fertilizers provide more stable demand relative to other key nutrients such as potassium and phosphate.

Still, the company does appear to have a cost advantage in its operations -- a key consideration for a commodities-type business. First, its location in America's heartland puts it close to agricultural consumers, giving CVR a transportation cost advantage and allowing it to sell into this higher-margin market.

Second, the company's use of petroleum coke gasification gives it a price advantage over competitors, virtually all of which use natural-gas-based methods. CVR Partners reports that its costs are "79% fixed and relatively stable." And as natural gas prices rise, the company gains a further advantage over rivals, whose production costs are 85%-90% based on natural gas.

And then there's that distribution...What drew my attention was the company's estimated distribution for the upcoming year of $1.92 per share. At yesterday's closing price of $17.93, that would be an estimated yield of about 10.7%. That figure clearly surpasses others in the publicly traded partnership space.

Company	TTM Yield	Distributions per share
Terra Nitrogen LP (NYSE: TNH  )	5.0%	$5.44
Inergy LP (NYSE: NRGY  )	7.1%	$2.37
Buckeye Partners LP (NYSE: BPL  )	6.4%	$3.88
Linn Energy LP (Nasdaq: LINE  )	6.8%	$2.58
Penn Virginia Resource Partners LP  (NYSE:PVR  )	6.9%	$1.56
Average	6.4%

Source: Capital IQ, a division of Standard & Poor's. 

So, based on other publicly traded partnerships, it looks like an average yield is in the mid-sixes. Giving a comparable yield to CVR Partners puts shares at $29 to $31 -- or up 65% at the midpoint of the range. The company intends to pay out all available cash it generates each quarter, with the general partner having a non-economic interest and not being entitled to cash distributions. Now that looks pretty tempting ... but is it?

Well, the company provides several caveats on its payouts in its prospectus:

• "Unlike most publicly traded partnerships, we will not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase distributions over time." (p. 19)
• "Investors who are looking for an investment that will pay regular and predictable quarterly distributions should not invest in our common units. We expect our business performance will be more seasonal and volatile." (p. 19)
• "Our partnership agreement does not require us to make any distributions at all. Accordingly, investors are cautioned not to place undue reliance on the permanence of such a policy in making an investment decision." (p. 19)

So CVR Partners states up front that shares will likely be volatile due to the nature of the industry and management's own distribution policies. And if the dividend is below the market's expectations, you can expect shares to drop, too. With the company paying out all its cash, where do you think money for expansion will come from? Issuing more shares, of course, as is typical for limited partnerships.

Foolish bottom lineWith a yield that's more than 10% at current prices, the shares probably have room to move to reach yields that are more comparable to other publicly traded partnerships. But given its dividend policy, CVR Partners might not be for everyone, especially income investors who need rock-solid and growing dividends quarter after quarter.