A Tanker Stock Has Double-Barreled Profits
07/19/2010 1:30 pm EST
Bryan Perry, editor of Cash Machine, says a giant tanker firm is a good play on oil demand and offers a big yield and dividend growth as well.
More than 65% of world commerce is transported by oceangoing vessels, and two-thirds of that commerce is crude oil.
Tanker companies transport crude oil from ports near the production fields to ports near major refineries. They work under a variety of short-term (spot) and long-term contracts for clients that include major oil companies, oil traders, and governments.
Safety [and environmental] concerns have led to a consolidation in the industry and further requirements to allow only double-hull tankers in most ports. Double-hull tankers will be required for the transport of crude oil by the world's leading ports starting this year, with global compliance for all ports to take effect during the next two to three years.
Crude oil transportation demand is outstripping the recession-induced slimmed-down cargo capacity. As a result, tanker companies are scoring bigger profits this year, and those are being reflected in the firming share prices of some selected stocks.
Moreover, many tanker firms operate like oil trusts and return a large portion of their profits to shareholders. Dividend yields range from 5% to 15%, depending on the company. The only down side is that dividend streams in the sector can be erratic. Nevertheless, the upward trend in charter day rates for shipping oil is intact.
After the sector peaked in 2008, most of the double-hull tanker stocks got sol -off very heavily when oil prices retreated below $50 per barrel and dividends were slashed across the board by most carriers. As oil prices and the global economy have firmed, cash flows are back up, with dividends back on the rise.
The company offers investors down side protection while maintaining some up side by managing its fleet through a mix of fixed-rate charters and spot-tanker-market trading. This allows for a risk/reward balance and low dividend breakeven rate, making it possible for TNK to pay a dividend even when spot markets are weak.
Since its inception, TNK has been the principal growth medium for Teekay Corp.'s tanker franchise. The company is pushing to increase TNK's dividend, because it receives 20% of its cash flow above $3.20 per share as long as shareholders received a minimum per share dividend of $2.65 in the previous years. The current annual dividend payout is $1.48 per share for a current yield of 13.43%.
Net demand for oil on a global basis is trending higher, and getting crude to its rightful destinations from the source is taking longer because of [greater] distances. This creates twin catalysts for TNK shares to trade higher and provide for rising dividend payouts. Those two drivers, plus arguably the best-run crude tanker shipping company, make a strong investment case for owning TNK. Buy under $13. (It closed below $12 Friday—Editor.)