(Updates with background, analyst's comments)
By Rod Nickel
July 29 (Reuters) - Shares of CF Industries Holdings Inc spiked nearly 12 percent on Monday after activist hedge fund Third Point LLC said it had acquired a stake in the U.S. fertilizer company.
CF, the world's second-largest maker of nitrogen fertilizer, should be paying a bigger dividend to shareholders, Third Point said in its quarterly newsletter. The fund, headed up by Daniel Loeb, did not disclose the size of its equity position in the letter.
"CF currently trades at an unwarranted discount to fertilizer and commodity chemical peers," the hedge fund said in the letter, dated July 29. "We believe its structural cash flow generation strength is misunderstood and that management should deliver a much larger dividend to its shareholders."
Third Point said that CF's access to low-cost North American natural gas - the primary input in nitrogen fertilizer production - gives the company an advantage over global peers with higher input costs. The spread between the production costs of CF and higher-cost rivals is a sustainable stream of cash flow, it said.
The world's biggest nitrogen producer is Norway-based Yara International ASA.
CF was not immediately available for comment. CF, based in Deerfield, Illinois, is scheduled to report second-quarter results on Aug. 6.
The CF's dividend yield - the ratio of the annualized dividend to the price of the stock - is below that of other fertilizer companies like Yara, Agrium Inc, Potash Corp of Saskatchewan and Mosaic Co.
The discussion between CF management and Third Point is likely to be over whether CF should continue with its $3.8 billion expansion of U.S. fertilizer plants in Louisiana and Iowa, or scale it back and hike the dividend, said Mark Gulley, analyst at BGC Financial LP.
A Third Point spokeswoman said it had no further comment.
CF is the second major North American fertilizer company to attract the interest of an activist investor. Jana Partners bought a stake in Calgary, Alberta-based Agrium last year and pushed for a breakup, but the company swept a proxy vote in April.
CF shares surged 11.8 percent or $21.30 to $202.30 in New York, touching their highest price in four months. (Additional reporting by Katya Wachtel in New York; Editing by Gary Hill and Marguerita Choy)