Two Deep-Water Plays on Rising Economic Tide
01/18/2011 1:20 pm EST
Ship Finance and SeaDrill pay nice yields that should increase as growth quickens, writes Bryan Perry of Cash Machine.
The latest economic data, both here and abroad, point to a slow-but-steady global recovery in the developed world, with demand for dry bulk and crude oil on the rise this year and beyond. We've already seen the effect a small decline in crude storage numbers can have on the price of a barrel of oil—now at $90-plus with consensus among oil traders that $100 oil is just around the corner.
I have just the ticket for investors seeking a healthy dividend yield of 6% in an offshore drilling company and a highly diversified cargo operator.
Bulking Up the Dividend
Currently yielding 6.4%, Ship Finance (NYSE: SFL) is the most diversified of all ocean-going cargo carriers. The company operates a fleet of 32 double-hull oil tankers, eight dual purpose dry/oil tankers, one dry bulk carrier, eight container ships, one jack up rig, three ultra-deep water units, six offshore supply vessels and two chemical tankers. It's almost an ETF for the shipping industry.
At its current price of $22.34 per share, SFL carries a market cap of $1.8 billion, with 2011 revenues expected to increase by 14% to $360 million. With a payout ratio [the proportion of earnings paid out as dividends—Editor] of only 46%, it's no wonder this meticulously well managed company raised its dividend three times in 2010 and is poised to continue raising its dividend payout this year as well.
You just aren't getting that kind of news out of 90% of other shipping companies. Shares of SFL traded above $30 in early 2008 and that's where I believe they will again revisit and represents my one-year price target.
Clearly, SFL has outperformed all other shipping stocks listed, trading up from $16 to $22 during the past year. The chart above is very bullish. It's what stock technicians call an "ascending pennant formation." A little more work in the $22 to $23 area and it should be up and away to $30 by this time next year. Buy SFL below $23.
The Best Rigs in the Business
SeaDrill (NYSE: SDRL) is a different sea monster altogether that carries with it a unique opportunity for income investors seeking a pure play in deep water drilling outside of the Gulf of Mexico. A Cash Machine subscriber actually tipped me off about this name about six months ago when it was in the mid-$20s range following the BP oil spill. Now the stock is at $33.87 and yet still has a tremendous upside story. Shares yield 5.5%.
The company was formed in 2005 and owns the most state-of-the-art drilling equipment in the entire industry, commanding premium day rates. It is in big demand, with utilization rates running near 100% as big oil deposits become harder to find without going deep. This company operates globally in 15 countries on four continents, owning 54 rigs but only one in the Gulf of Mexico. Most of its drilling activity is off the coast of Norway and South Asia.
They say that a picture is worth a thousand words. So is a chart. The current "wedge pattern" almost always results in a sharp spike up or down. In the case of SDRL and its earnings momentum, the next multiple-point move looks to be higher. This will be especially true if crude oil tops $100 per barrel, which many oil traders view as a foregone conclusion.
Compared with its peers, SeaDrill has a higher return on assets (9.1%), higher return on equity (11.7%), higher gross margins (56.8%) and higher profit margins (38.8%). With financial metrics like these, I see shares of SDRL trading up to my one-year price target of $45. Buy SDRL below $35.
Both stocks have highly constructive chart formations, pointing to higher share prices ahead on technicals alone. But with the recent breakout in the price of crude and economic uptick, Ship Finance and SeaDrill are my favorite ways for high-yield investors to set sail for 2011.