Would CF Industries Holdings, Inc. (NYSE:CF) Be Valuable To Income Investors? – Simply Wall St

Dividend paying stocks like CF Industries Holdings, Inc. (NYSE:CF) tend to be popular with investors, and for good reason some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, its important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope youll find our analysis useful.

A 2.5% yield is nothing to get excited about, but investors probably think the long payment history suggests CF Industries Holdings has some staying power. The company also returned around 6.3% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple analysis can offer a lot of insights when buying a company for its dividend, and well go through this below.

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Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a companys net profit after tax is a simple way of reality-checking whether a dividend is sustainable. CF Industries Holdings paid out 60% of its profit as dividends, over the trailing twelve month period. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

We also measure dividends paid against a companys levered free cash flow, to see if enough cash was generated to cover the dividend. CF Industries Holdingss cash payout ratio last year was 24%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. Its encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings dont drop precipitously.

As CF Industries Holdings has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). CF Industries Holdings has net debt of 2.13 times its EBITDA. Using debt can accelerate business growth, but also increases the risks.

We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the companys net interest expense. With EBIT of 4.07 times its interest expense, CF Industries Holdingss interest cover is starting to look a bit thin.

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of CF Industries Holdingss dividend payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past ten-year period, the first annual payment was US$0.08 in 2009, compared to US$1.20 last year. Dividends per share have grown at approximately 31% per year over this time.

Its rare to find a company that has grown its dividends rapidly over ten years and not had any notable cuts, but CF Industries Holdings has done it, which we really like.

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividends purchasing power over the long term. Over the past five years, it looks as though CF Industries Holdingss EPS have declined at around 17% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

To summarise, shareholders should always check that CF Industries Holdingss dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think CF Industries Holdings has an acceptable payout ratio and its dividend is well covered by cashflow. Its not great to see earnings per share shrinking. The dividends have been relatively consistent, but we wonder for how much longer this will be true. In sum, we find it hard to get excited about CF Industries Holdings from a dividend perspective. Its not that we think its a bad business; just that there are other companies that perform better on these criteria.

Given that earnings are not growing, the dividend does not look nearly so attractive. Businesses can change though, and we think it would make sense to see what analysts are forecasting for the company.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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Would CF Industries Holdings, Inc. (NYSE:CF) Be Valuable To Income Investors? - Simply Wall St