Dan Loeb Might Not See CF Dividend With FCF Expected to Be Negative


Hedge fund manager, Dan Loeb of Third Point said CF Industries Holdings, Inc. (NYSE:CF) may distribute higher dividends to shareholders and he emphasized that the company is trading at an “unwarranted discount” compared with its peers in the fertilizer and commodity chemical sector.

Dan Loeb’s letter to Third Point’s Investors

In his letter to Third Point’s investor for the second quarter, Dan Loeb said that CF Industries Holdings, Inc. (NYSE:CF), the largest nitrogen fertilizer manufacturer in North America and the lowest-cost producer worldwide, is misunderstood in terms of its structural cash flow generation strength. He also emphasized that a higher dividend would highlight its ability to sustain its cash flow generation, which could lead to a substantial re-rating.

According to Dan Loeb, CF Industries Holdings, Inc. (NYSE:CF) has an edge over its foreign competitors toward achieving a sustainable margin because it has access to low-cost natural gas in North America, which is a primary factor in nitrogen fertilizer production. He pointed out that the company’s global competitors have higher input costs, and they provide a standard price for nitrogen fertilizer because they idle the production when the price nears their costs.

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“The spread between CF’s production cost and that of the higher cost producers is a sustainable stream of cash flow for CF, with limited volatility,” according to Dan Loeb.

Dan Loeb estimated that the cash flow stream of CF Industries Holdings, Inc. (NYSE:CF) would be ~1.2 billion per year.  He said the company is trading at 11% free cash flow yield with its current equity value. He emphasized that CF Industries should receive a bond-like multiple given the low risk profile of cash flow, and also implies a significant upside to its existing stock price.

“CF management has the ability to highlight the value of this stable cash flow stream by paying a significant portion of it as a dividend. A high dividend payout would still leave CF’s leverage well below the 3x debt to EBITDA criteria that Moody’s recently established as adequate to maintain their current debt rating of Baa2,” added Dan Loeb.

CF Industries distributing dividends

CF Industries Holdings, Inc. (NYSE:CF) is currently distributing dividend $0.40 per share to shareholders. Analysts estimated that the company will generate $7.74 earnings per share excluding one-time items for the second quarter.

Commenting on the recommendation of Dan Loeb, BGC analyst Mark Gulley said, “What’s potentially significant is that Third Point’s comments could lead to a curtailment in CF’s $3.8 billion expansion program. They’re not talking about that now, but it seems like a logical next step.”

On the other hand, analysts at Felth and Company believe that CF Industries Holdings, Inc. (NYSE:CF) has the ability to boost its dividend payout, but they prefer the company to repurchase its stock. The research firm emphasized, “Although the company has excess cash flows at present, this will not always likely be the case and we like the flexibility that buybacks provide compared with ‘relative permanence’ that a higher dividend would imply.

Meanwhile, BMO Capital Markets analyst Joel Jackson estimated that the company would be FCF negative in 2013/14 with its large nitrogen expansions. He even projected that CF Industries Holdings, Inc. (NYSE:CF)’s FCF in 2015/16 would be approximately $400 million. He noted that the company has a $3 billion shares repurchase program until 2016 with ~$100 million dividend payout. Jackson added that the company needs a sizable leverage to raise its dividend and meet commitments.

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