by Robert Hauver
Looking for more income from your portfolio? Income investors have been hopping aboard shipping dividend stocks in 2016, enticed by their high dividend yields.
This sub-industry has certain companies which are becoming more well-known for their stable business models, which are based upon long term contracts, with solid counter parties. After all, who doesn’t want to have a glimpse into the future? These stocks will typically have around a 5-year or longer remaining length of time on their contracts, not including options to extend.
They’ve all IPO’d within the past approx. 5 years, and their cash flow and earnings growth is based upon a “dropdown” model, in which their parent companies, usually known as sponsors and/or general partners will sell them assets, which already have signed contracts on them.
2 of these stocks, DLNG and GMLP, are in the LNG, (liquefied natural gas), shipping business – which is heading toward major production growth in the US and Australia, as long term projects start producing and shipping.
DLNG is in a unique niche – it has the only cold weather fleet capable of shipping LNG over the harsh northern arctic sea routes. KNOP is also a niche player – it owns a fleet of shuttle tankers. Crude producers can’t make any money on their oil unless they get it into port, and guess what? It’s a whole lot cheaper to hire a tanker, vs. building an underwater pipeline. The shuttle tanker business is tiny compared to other shipping segments, so there’s not a lot of competition or speculation in it.
NAP owns VLCC’s – (very large crude container vessels), which are in strong demand due to the oil glut. All of these stocks’ vessels are contracted out into the future, vs. playing the spot market.
Their Price to Distributable Cash Flow ratios are all attractive – NAP uses a Cash Available For Distribution metric, which we’ve used in this table. NAP is selling below Book Value, but maybe not for long – it reports on 4/27/16.
Distributions: Our High Dividend Stocks By Sectors Tables track all of these 5 stocks and their current yields, in the Energy section. These high dividend yields are all well-covered, and they should all go ex-dividend in the first week of May.
DLNG also has Preferred A Series shares with a huge 13.05x distribution coverage, that has a long term liquidation yield of almost 13%. This table details what your income and eventual price gain would be, if you buy these shares now, and hold them until their 8/12/20 Call Date, and if DLNG redeems them on 8/12/20. If they don’t, they must keep paying you the $.5625 distribution/dividend every quarter until they do redeem them.
These are cumulative shares, so DLNG must pay you any dividends it misses. In addition, they can’t stop paying these preferred dividends and keep paying their common ones…and we all know what happens when a stock cuts their common payouts – management definitely doesn’t want to do it.
Options: We’re currently tracking 2016 options-selling trades for KNOP and GMLP in our free Covered Calls Table, and our Cash Secured Puts Table, both of which have details for option trades on over 30 stocks.
Consensus Price Targets: After being beaten down in 2015, these shipping stocks have come back full speed ahead, especially since mid-February, when Crude Oil bottomed out. It appears that the market has finally sifted through this industry, and rewarded the stocks representing the strongest business models.
You know what’s amazing, though? These stocks are up anywhere from 28% to over 78% in the past quarter, and they’re still down over the past year:
Currently, GMLP has the most variance vs. the consensus price target. Most of them report earnings over the next few weeks, so we may see analysts adjusting their price targets after the new reports come out:
Financials: NAP has the lowest Debt/Equity, and the highest Current Ratio of this group. The 2 LNG stocks, DLNG and GMLP, have much higher margins than NAP and KNOP.
Disclaimer: This article is written for informational purposes only. Please perform your due diligence before investing in any of the stocks mentioned in this article.
Disclosure: Author owned NAP, DLNG, DLNG-A, KNOP, AND GMLP at the time of publication.