Third Point LLC, the hedge fund led by billionaire Daniel Loeb, said CF Industries Holdings Inc. (CF) trades at an “unwarranted discount” to its fertilizer and chemical peers and should pay a larger dividend.
Lower U.S. natural gas prices give CF, the largest U.S. producer of nitrogen fertilizer, a “sustainable margin” over foreign competitors, Third Point said yesterday in its second-quarter letter to investors. That provides Deerfield, Illinois CF with a steady source of cash with which to increase its payout to investors, the fund said.
CF, in which Third Point said it has a stake, jumped 12 percent to $202.30 in New York yesterday, the biggest gain since 2008.
“We believe its structural cash flow generation strength is misunderstood and that management should deliver a much larger dividend,” Third Point said. “Such a dividend would highlight the sustainability of its cash flow generation and lead to a substantial re-rating.”
Loeb, 51, concentrates on event-driven investing, or trading in stocks or bonds of companies going through mergers, spinoffs or other changes. Third Point made $655 million last week when Yahoo! Inc. bought back 40 million of its shares from the fund, two years after Loeb began agitating for its board to resign. The fund also has a stake in Sony Corp. and is calling for a partial sale of the Japanese company’s entertainment unit.
Dan Swenson, a CF spokesman, didn’t immediately return a call seeking comment. The company is scheduled to report second-quarter earnings after the close of trading on Aug. 6.
CF pays a quarterly dividend of 40 cents a share and is expected to earn $7.64 a share in the second quarter excluding one-time items, according to the average of 19 analysts’ estimates compiled by Bloomberg.
The stock declined 11 percent this year before yesterday, compared with a 7.4 percent gain in the S&P 500 Materials Index.
Third Point’s comments come as the boom in U.S. production of shale gas transforms U.S. industries from fertilizers to petrochemicals. CF is among U.S. companies planning to build production capacity to take advantage of historically low gas prices. Gas is used as a raw material to make nitrogen fertilizer, an essential plant nutrient that increases crop production.
“What’s potentially significant is that Third Point’s comments could lead to a curtailment in CF’s $3.8 billion expansion program,” Mark Gulley, a New York-based analyst at BGC Partners LP, said yesterday in a telephone interview. “They’re not talking about that now, but it seems like a logical next step.”
A higher payout would still leave CF’s leverage at less than three times earnings before interest, depreciation and amortization, Third Point said.
“CF has been underperforming recently despite the emergence of several positive indicators, including reduced Chinese plant operating rates, reports of capacity idling in Eastern Europe, and the shelving of two plant expansions in North America,” New York-based Third Point said.
Third Point manages about $13 billion and returned 3.3 percent in the second quarter and 12.6 percent in the first half of the year, according to the letter.
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