Ship Shape Yields...

11/11/2005 12:00 am EST

Focus:

Carla Pasternak

Editor, The Income Investor

"Shipping stocks offer high double-digit yields," says income expert Carla Pasternak. "But you'll need to do some digging, as some of the best deals are often found among the lesser known names." Here, she looks at some favorites in the sector.

"Finding juicy yields on tanker stocks is the easy part. After all, the group sports an average yield of 6.6% and rising. However, the most difficult task for investors is uncovering stocks that are generating sufficient cash flows to keep paying dividends at a steady or increasing rate year after year. Overall, tanker stocks have been in a downtrend since March, and most are currently trading near their 52-week lows. The silver lining for income investors is that the recent pullback in share prices has caused yields to soar.

"Among dry bulk shippers, Eagle Bulk Shipping (EGLE NASDAQ) is the new kid on the block, having gone public in June. It owns the largest fleet of small-sized dry bulk carriers in the US. The vessels ship iron ore, coal, grain, cement, and fertilizer around the world. Its 13-ship fleet is contracted under attractive longer-term charters of one to three years. This strategy ensures stable cash flow and high utilization rates that, in turn, support steady dividend payouts.

"Eagle's shares have been more stable than many of its peers and have been trading above their $14 issue price for the past couple of months. The 180-day holding period expires on December 17th, so we may see some downward pressure on the shares at that time. But that is probably already factored into the current price. The company said it plans to increase its next quarterly dividend to 57 cents, payable in February 2006. At that rate, the stock yields 15.8%."

"US Shipping Partners LP (USS NYSE) sticks close to home. Its 16 tankers and tugboats move along the US coastline, carrying petroleum products from one refinery to another for processing. Its longer-term contracts ensure relatively predictable cash flow and dividend payments. Formed in 2002, USS went public in late 2004. USS is a limited partnership. That means the company passes through to shareholders most of its earnings, resulting in an impressive dividend yield of 7.6%.

"Although US Shipping is too new to have a long dividend track record, the three solid quarterly payments bode well for the future. Since part of the distribution from limited partnerships doesn't qualify for the reduced 15% tax rate, investors may want to hold USS shares in a tax-advantaged account. Earnings are expected to dip this quarter, partly as a result of refinery shutdowns in the Gulf Coast. Trading at the low end of its 52-week range, with a p/e about 17 times this year's estimated earnings, USS appears attractively priced.

"Transporting liquid petroleum products like gasoline is just one of the businesses of Martin Midstream Partners LP (MMLP NASDAQ); the company also owns shipping terminals, sells liquefied natural gas, makes fertilizers, and stores sulfur. This diversified income stream provides the limited partnership with stable cash flows and a steady dividend base. Its fleet of 53 barges and tugboats moves bulk liquids for refineries in the Gulf Coast region of the US.

"Martin Midstream has grown by quickly and efficiently integrating a series of acquisitions since going public three years ago. As a result, earnings have increased a robust 30% a year for the past three years. It has paid regular quarterly dividends at an increasing rate every quarter since January 2003. The planned quarterly dividend payment of 57 cents per unit brings the stock's forward yield to 7.1%. As a limited partnership, the stock is best held in a tax-deferred account. P riced at just 17 times next year's earnings, the shares seem like a bargain.

"Overall, I consider all three of the companies-EGLE, USS, and MMLP- to be relatively safe bets in a very unpredictable corner of the income universe. For the yield-hungry investor, Eagle is obviously the top choice in this group. However, keep in mind that it also has the shortest track record. At the other end of the spectrum, Martin Midstream offers the safest distribution and is a proven dividend-grower. Meanwhile, U.S. Shipping has an enticing yield, and given the company's long-term charters, its distributions should be secure."

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