The common shopper most likely comes throughout presents commonly that will greatest be described as “too good to be true.” There’s a variation of this truism that applies to dividend buyers searching for new shares. Some dividends they encounter are greatest described as “too good to final.” 

Lately, dividend buyers had been knowledgeable that CVR Companions (UAN 0.38%) now presents an enormous 38% distribution yield. Whereas the yield is in reality actual, it’s nonetheless too good to final if you happen to take the time to know what is going on on.

The numbers concerned with CVR Companions

Dividend yield is a straightforward math equation that takes an organization’s annual dividends per share and divides them by the inventory worth. The one caveat right here is that the dividend is commonly annualized utilizing the newest quarter, which helps account for dividend will increase which will have simply taken place. Thus the equation is commonly the present quarterly dividend multiplied by 4. Within the case of CVR Companions, the newest quarterly distribution was $10.43 per unit. Divide that by the unit worth, which is round $85, and also you get 49%.

A extra conservative strategy to calculate yield is to take a look at the final 4 quarterly funds. For CVR Companions, the sum of the final 4 distributions is $32.75. That is the maths that you will discover on some on-line inventory quote suppliers. The yield, on this case, is a extra conservative, however nonetheless astronomically excessive, 38%. 

Each of those percentages ought to trigger buyers to hit the pause button. A yield of 10% or extra usually signifies that there are dangers to the dividend. On the very least, a yield that top or larger ought to result in a really deep dive into an organization’s enterprise to ensure that the fee is sustainable. It’s extremely unlikely that CVR Companions’ 38% yield (or 49%, relying on the way you calculate it) is sustainable.

CVR Companions has its ups and downs

CVR Companions’ distribution coverage is the primary warning signal: “It’s at the moment the coverage of the Board of Administrators of the overall accomplice of CVR Companions to distribute the entire accessible money we generate every quarter, as decided by the Board of Administrators.” From a plain-English standpoint, that claims the dividend is variable and tied to efficiency. It’s designed to go up and down over time.

Including to the variability right here is that fertilizer gross sales are seasonal. When farmers are utilizing fertilizer, demand and gross sales shall be robust. However when the rising season ends, demand falls off. That may be seen over the previous yr, with the distribution fee within the fourth quarter of 2022 a mere $1.77 per unit. The opposite three distributions over the previous yr had been all above $10 per unit. Should you purchased CVR within the hope of residing off the revenue it generated, the drop of over $8 per unit in that one quarter might trigger an actual downside.

UAN Dividend Per Share (Quarterly) knowledge by YCharts.

Maybe most vital, nonetheless, is that fertilizer is a commodity. Meaning provide and demand play an enormous position in how a lot CVR Companions can cost for the merchandise it sells. If demand is excessive, it could actually reap huge earnings due to excessive costs. If demand is low, nonetheless, costs and earnings will seemingly fall fairly exhausting. These varieties of swings are pretty typical for commodity companies.

To place some numbers on this, earlier than the distribution jumped as much as $10.05 per share within the third quarter of 2022, it was simply $2.26. The three quarters previous to that got here in at $5.24, $2.93, and $1.72. It isn’t that these are good or dangerous numbers, however they’re clearly a lot decrease than the present distribution. 

Not for everybody

CVR Companions’ large distribution yield is neither an phantasm nor a mistake. However it’s most actually not a determine you may count on to final over the long run. The variable coverage married up with a seasonal commodity enterprise ensures that. In case you are a dividend investor seeking to dwell off of the revenue your portfolio generates, you may wish to tread with excessive warning right here.