Ag cooperative giant CHS (Cenex Harvest States) has now turned into a oil refining company masquerading as a ag company.
CHS was a darling of mine many years ago so I thought I should check in with them because of the 5 preferred issues they have outstanding.
CHS preferreds have always been good to investors–with coupons much higher than comparable corporations would offer.
Some may remember–and some may not know this–that the 1st issue from CHS was issued primarily to cooperative members way back in 2003–it was a whopping 8% coupon (CHSCP), which became redeemable in 2008. In 2013 the company changed the terms of the issue so that it would not be redeemable until 2023. During the years of 2003-2008 the company issued another 9 million (more or less) of these shares–even though they could have garnered a lower coupon–the ownership remained strongly in the hands of many of their members, thus it always remained a strongly traded issue and I have always surmised that the optional redemption period on this issue was extended simply as a bit of a concession to the members/owners.
After this initial issue (in 2013, 2015 and 2015) the company began to sell new issues of preferred stock–primarily to build a massive fertilizer plan in North Dakota. The new facility was never built and instead the company invested proceeds in giant fertilizer company CF Industries (CF)–quite honestly this investment has not provided much in the way of profits until recently.
So what is the company doing lately in this absolutely horrible ag economy? Actually they are making quite a bunch of money–but little of the profit comes from the ag end of the business.
The cooperative had net income of $819 million for the year ending 8/31/2019–$618 million was generated from the 2 refineries they own as well as 1,450 retail outlets. Ag contributed a measly $43 million of net income (off revenue of $24 billion), while the nitrogen investment in CF Industries kicked in $73 million. Investments in Ardent Mills (the nations largest flour miller–a venture with Cargill and and ConAgra) and Ventura Foods contributed $81 million.
So while the lions share of revenue comes from the ag segment it produces almost no profits right now.
The total revenues the company has produced during the last 3 years have all been in the $31-$32 billion area which actually is pretty respectable for operating in the ag segment of the economy. Of course, if you go further back you will see they had revenue of $44 billion at the peak for the year ending 8/31/2013. Energy has always been a pretty large chunk of earnings for the company–so right now the prime difference is the lack of contribution from the ag business.–now if this was a publicly owned company shareholders would be pounding the table to get rid of the ag business. Obviously this won’t happen.
So as a whole the company is performing well. Unfortunately energy at some point will perform poorly and one can only hope that the ag economy has straightened out by then. Looking further at the company’s debt situation–I always look closely at the debt–things look good. Most companies can perform relatively well–even in a recession, if their debt is under control. In this respect CHS runs a pretty tight ship. They have $1.8 billion in long term debt and $2.2 billion of notes outstanding–a total of $4 billion in debt against $16 billion in assets. Equity is around $8.6 billion. Interest rates on the debt run from 2.25% to 5.40%–the debt is all unsecured. So debt is really a small consideration for the coop.
The company’s 10-K filing for the year can be seen here.
Now going back to the preferred stock–
CHSCP, 8% perpetual is currently trading at $28.15 and is optionally redeemable starting 7/2023.
CHSCO, 7.875% perpetual is currently trading at $27.60 and is optionally redeemable starting 9/2023.
CHSCN 7.10% reset rate perpetual is currently trading at $27.83 and is optionally redeemable starting in 3/2024.
CHSCM 6.75% reset rate perpetual is currently trading at $26.40 and is optionally redeemable starting 9/2024.
CHSCL 7.50% perpetual is currently trading at $27.38 and is optionally redeemable staring 2/2025.
So as a new buyer (I haven’t had shares for a long time) these issues don’t look too attractive on a yield to worst basis. On the other hand knowing that the air won’t come out of the price until maybe 12 months before possible redemption and having 3.5 to 5 years before potential redemption maybe a tiny buy is in order?
Do I really like CHS enough to buy the CHSCL 7.50% issue at a current yield of 6.85%–and a yield to worst of 5-5.25%? I doubt it.