Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

This 3.5% Dividend Payout Is "High Yield" in Disguise, Best Dividend ETFs

Companies / Dividends Oct 25, 2013 - 12:18 PM GMT

By: Money_Morning

Companies

Robert Hsu writes: If I offered you an investment that pays 3.5% a year, and one that pays 12% a year, which one would you choose?

All else being equal, we'd be fools not to take the 12% offer.

Of course, "all else" is rarely equal... especially in a rising interest-rate environment. "Growth," as you'll recall, is the new "income."


That's why we need to look well beyond yield to evaluate a dividend payer, and focus on total return.

The first company we'll look at today, for example, will pay you $12 a year for every $100 you invest in its stock. That certainly seems appealing.

But this second company - despite its lower payout - is a far better investment, for three reasons...

A Tale of Two Dividends

Let's look at two companies in the same sector, just to make sure we're comparing apples to apples...

Or, in this case, fertilizer to fertilizer ....

Rentech Nitrogen Partners LP (NYSE: RNF) is a mid-sized, $1.1 billion market cap, fertilizer company, structured as a Master Limited Partnership. That means they are designed to pay out to unitholders nearly all of their earnings as cash distributions.

Canada-based Agrium Inc. (USA) (NYSE: AGU) is the third-largest fertilizer company in North America, with a $12.7 billion market cap. Unlike Rentech, the much larger Agrium is structured as a corporation, which means it retains most of its earnings.

In the most recent quarter, Rentech paid out a cash distribution to unitholders of $0.85 per unit, or 2.96% (11.9% annualized).

That number trounces the payout made to shareholders by Agrium of $0.75 per share, or 0.87% (3.5% annualized).

But, this is a case where I think investors are much better served owning a 3.5% yield than a near-12% yield.

Simply put, Agrium is a much better investment to own than Rentech - even though Agrium's annualized dividend yield is far less than Rentech's.

Here are three reasons why.

1. Growth Is Trending Upward

Rentech's recent dividend payout trend is going in the wrong direction. In Q3 2012, the company payout was $1.17 per unit. The payout in Q3 of this year is down about 30%. Meanwhile, Agrium's dividend yield is trending higher. In the same quarter a year ago, the company paid a dividend of $0.50 per share. The most recent payout of $0.75 per share represents a 50% increase in payout, year over year.

2. The Payout Ratio Is Grounded in Reality

Rentech's trailing 12-month EPS was $2.32, of which free cash flow was less than half. Yet the company is expected to pay out a $3.40 cash dividend at current payout rates. A free cash flow payout ratio of more than 300% almost certainly is unsustainable, and that means dividends will likely be cut sharply going forward. Agrium's trailing 12-month EPS was $9.02, of which free cash flow was nearly $6.00 per share. This is more than sufficient to sustain its current $3.00 per share dividend payout and near 50% payout ratio.

3. The Price Is Right

It's been a tough year for the fertilizer industry because of a sharp drop in fertilizer prices, rising natural gas prices, and the sordid break-up of the Russian fertilizer cartel this summer. The declines in the space now have Rentech earnings down by 30% and trading at a trailing 12-month PE of 12.3. Agrium earnings were down only 12% and the stock is almost a quarter cheaper at trailing 12-month PE of 9.6.

As you can see, Agrium wins on all three of the aforementioned measures. Moreover, I think Rentech is using unsustainably high dividends to lure investors - a situation known as a dividend trap, and one that savvy investors need to avoid at all costs.

The bottom line here is that Agrium with its 3.5% yield is clearly a superior holding than Rentech with its 12% yield.

You don't have to take my word for it, either. The market agrees with this assessment. Shares of Rentech are down some 20% over the past six months. At the same time, Agrium shares are down just 4%, despite all the trouble in the sector.

The smart money knows: Sometimes 3.5% is better than 12%.

Source :http://oilandenergyinvestor.com/2013/10/the-unconventional-outlook-from-the-foggy-streets-of-london/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in