I grew up
in New York City, not far from the waterfront. As a special
treat, my father would take me to the piers off Atlantic
Avenue in downtown Brooklyn.
There we would stand and watch with amazement as forklifts
unloaded heavy packages of cement and grains from gigantic
ships that had just arrived from faraway places like Asia
and South America.
This was my first contact with the shipping industry, and
little did I know how big an impact shipping would have on
the world -- and my income investing.
Today, marine shipping is responsible for transporting an
estimated 90% of world trade. And while shipping is an
ancient form of transportation, it's being used more and
more as world markets open up.
Over the past 40 years, total shipping has grown four-fold
-- from just over 8,000 billion metric-ton miles in 1968 to
an estimated 32,000 billion metric ton-miles in 2008,
according to Fearnleys Review.
And in
the economic downturn of the past two years, demand for
shipping -- and the dividends paid by many shipping
companies -- fell sharply. But now the industry has started
to turn around, providing an early entry point for select
high-yield shipping stocks.
Freight Rates Up
Specifically, freight rates, an indicator of the health of
the shipping industry, have recovered from record lows for
shippers of all stripes. Consider the following:
So
what do all these indices have to do with shipping stocks?
The rates a shipper receives vary widely with the vessel
size, routes, and contract terms, but higher freight rates
generally translate to fatter profits.
Consider Bermuda-based Knightsbridge Tankers (Nasdaq:
VLCCF). The shipper earned an average $36,900 per day
for its oil supertankers and $44,300 per day for its dry
bulk carriers in the fourth quarter of last year.
That's up from $32,900 per day for the tankers and $39,200
per day for the dry bulk carriers in the prior quarter.
Meanwhile, break-even for these vessels is $19,300 per day
for the tankers and $16,900 per day for the dry bulk
carriers, providing the shipper with a tidy profit that more
often than not is distributed in the form of a high yield.
Yields Can be Volatile
With a global rebound in the works and strong demand from
China, the shipping industry's outlook is optimistic --
shipping consultant Drewry forecasts a +3.4% increase in
global container traffic this year over 2009. That will push
up average container freight rates about +15%, Drewry says.
But no matter how optimistic the forecasts, investors need
to tread carefully in this sector. Shipping rates and stocks
are nothing if not volatile.
For example, Capesize dry bulk vessels commanded an all-time
high of $233,988 per day in June 2008, only to fall to a
decade-low of $2,316 per day six months later.
Changing rates
can lead to wild swings in the shares and dividends of some
shippers. The problem is that some companies seek to
maximize earnings by leasing out fleets under short-term
charters at spot market rates. If rates rise, earnings --
and dividends -- rise in tandem, but the reverse is also
true.
Get on Board with Steady Shippers
For investors seeking a steadier income stream, shippers
with longer-term leases -- such as Navios Maritime (NYSE:
NMM) -- are the way to go. Their vessels are leased out
under long-term, fixed-rate contracts that provide stable
cash flow and dividends despite fluctuations in the
short-term spot market.
One final note:
It's
also important to check out the balance sheet of a shipper
before you invest. Since many of them pay out most of their
free cash flow as dividends, they often go to the capital
markets to finance growth. New ship purchases and
acquisitions can run in the millions of dollars. As such,
shippers tend to bear heavy debt loads, but some have more
cash flow than others to cover their debt and dividends,
while also financing growth.
This is one of the reasons many shippers saw their shares
tumble in the financial crisis. Of course, with a rebound in
both the global economy and shipping rates, now looks like
an opportune time to pick up stable shippers at reasonable
prices.
Good Investing!
Carla Pasternak's Dividend Opportunities
P.S. -- Shippers are great for income investors, but you
do have to be choosy about what you buy. That's why I
covered the industry in my March issue of
High-Yield
International -- bringing to light two of my favorite plays
(yielding as high as 8.4%).
Follow this link to subscribe
and read my latest issue...
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The Baltic Dirty Tanker Index (BDTI), which
tracks freight rates for crude oil transport on
12 routes, has nearly doubled from its September
2009 lows.
