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If you’re looking for income, look no further than the oft-overlooked shipping sector. It is “awash” with cash and is increasingly “passing it on to stockholders in the form of excellent dividends”, says Jeffrey Kosnet on Kiplinger.com.
The reason for this is a recent change in management philosophy. Whereas firms would traditionally reinvest surplus cash flows into new ships (thereby guaranteeing the excess capacity that would inevitably fuel the next cyclical downturn), about three years ago a few firms decided to experiment with passing profits on to shareholders as dividends.
This initiative transformed a super-cyclical industry into one that closely resembles the real-estate industry – both are “selling time and space, and they own fixed assets that can gain in value as replacement costs rise”. And firms whose shares had previously risen or fallen on waves of “heavily leveraged earnings” suddenly became reliable (and often generous) dividend payers – especially in cases where the company’s ships “are tied to long-term contracts with escalators or favourable renewal options”.
Arlington Tankers (ATB, $21.93), which has a fleet whose leases are good until 2008 “and in some cases to 2011”, therefore offers investors a forward dividend yield in excess of 9%.
But although the new wave of thinking has caused the industry to split into new “yield-oriented” and traditional “leveraged” firms, that doesn’t mean that all of the investment opportunities are in the yield category – especially in cases where new capacity is supported by a growing market, such as America’s demand for energy. The US is importing “oceans” of crude oil, as well as 20% of its refined product. In addition, Western nations are increasing their imports of liquefied natural gas (LNG), which is transported in “hugely expensive specialised ships”.
Overseas Shipholding (OSG, $50.22) will benefit from all this, says Mara Der Hovanesian on BusinessWeek.com. Its shares are down by more than a quarter after softening shipping rates and Hurricane Katrina caused Wall Street analysts to rein in their earnings forecasts, but they nevertheless now trade “below the resale value of the company’s fleet of 61 vessels”, according to Philippe Lanier at Banc of America Securities. That makes it the “most undervalued” of the companies in his sector. Buy.
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Annunziata Rees-Mogg
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