1 Dividend Stock to Buy Now
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Prior to the economic meltdown of 2008 manufactures of sea-transportation vessels produced far more ships than were needed at the time. A massive glut in the market had formed. Then when the economy began its downward spiral, demand for ships and sea vessels became greatly diminished, and the companies that operated and owned these vessels began a downward descent. Some shipping companies were forced to file for bankruptcy, while others managed to stay afloat.
The tanker company Nordic American Tankers Limited (NYSE: NAT), for example, has failed to turn a profit in each of the last two years, and has had to borrow and dilute shares in order to maintain its dividend of 10.2%. While this does appear to be a lucrative yield, the instability of the company’s earnings and continuous debt and dilution spiral that the company is using will likely have a detrimental effect on its share prices in the long run.
Other shipping companies such as DryShips (NASDAQ: DRYS) are in even worse positions. Like Nordic American Tankers, DryShips has had volatile earnings and has been performing badly in the market. It lost money in 2011 and has had to borrow significant amounts of money to stay afloat. The company, however, is in an even worse situation than Nordic American Tanker as investors are not able to fall back on a dividend, as the company does not pay one.
While shares of Dryships and Nordic American Tankers may recover, the investments are speculative at best. Amidst the pile of rubble however there may lay a golden opportunity.
Ship Finance International ltd. (NYSE: SFL) owns transportation vessels and then charters these vessels out to other companies to operate. The company was started in 2003 as a subsidiary of Frontline (NYSE: FRO), and was spun off in 2004 as an independent company.
Despite being barely up from its IPO price in 2004 the company has done extremely well managing itself relative to its competitors.
Over the past 8 years the company has paid out nearly $14 per share in dividends, and currently yields 9.9%. Unlike many of its peers the company has relatively (emphasis on relatively) stable earnings and has managed to keep these earnings positive over the years. Valuation-wise the company looks cheap with a PE ratio under 10, and a forward PE of under nine.
The company is successful because unlike other shipping companies they don’t operate their own ships directly. The company purchases ships and then charters these out to other shipping companies under long-term agreements. This gives Ship Finance a lot more earning stability than other similar companies.
Most of Ship Finance’s oil tankers, for example, are chartered to Frontline Shipping. Frontline agrees to pay Ship Finance a predetermined amount, and then Frontline charters these ships out to someone else who operates them. Frontline then has royalty split agreements with Ship Finance where SFL will receive 25% of the revenues above a certain threshold.
This puts the company in a slightly safer position and allows it to maintain profitability and its dividends very well.
Additionally unlike many of its peers, as well as other high-yielding/high-debt stocks SFL does not have to worry about a rise in interest rates. The company hedges itself against interest rates by purchasing interest rate swaps, essentially turning their floating rate debt into fixed rate debt. This is very different from almost all other high-yielding, high-debt stocks. High-yielding, highly regarded Annaly Capital, for example, relies almost completely on the opposite approach. They borrow money with floating rates and then invest the money often in fixed-rate securities. If interest rates rise Annaly Capital will likely take a hit, while shares of Ship Finance will likely be left unaffected.
As the shipping industry improves it is likely that Ship Finance will be able to increase profitability even more, and may increase their dividend. Shares of Ship Finance are likely to appreciate in the coming years, but even if they don’t, investors can still enjoy the large dividend that it pays today. Ship Finance International may be the perfect stock for dividend investors to add to their portfolio.
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kf9211 has no positions in the stocks mentioned above. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
