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Ship Shape

12/15/2015 7:00 am EST


Tim Plaehn

Investment Research Analyst, Investors Alley

This featured recommendation—a holding in our model portfolio—is a tremendous value for income-focused investors, asserts Tim Plaehn, editor of The Dividend Hunter.

The recent drop in energy related stocks has pushed down the shares of Ship Finance International (SFL); the stock now yields 11.2%.

When the market figures out that the dividend is not at risk and more likely to be increased, the share price will again move back into the high teens and threaten to cross above $20.

Ship Finance came into existence as a 2004 spin-off from Frontline (FRO), at the time the world's largest crude oil tanker company.

It received 47 tankers from Frontline, which were leased back to FRO on long-term contracts.

Over the last decade, Ship Finance has expanded into the ownership of almost all classes of ships including crude oil tankers, car carriers, container vessels, dry bulk carriers, chemical tankers, and deepwater drilling units. In all, the company now owns 70 vessels.

Long-term lease contracts remain the stabilizing factor in the business model. The average remaining contract time is over ten years.

The Ship Finance ships are now spread among 17 customers, which include some of the largest names in shipping.

The rather dramatic drop in the SFL is the result of slowing results for several of the offshore drilling companies. However, the way Ship Finance has structured its offshore rig leases means the company is not at risk of losing the cash flow from those leases.

The rigs continue to produce high cash flows for the leasing companies, even in this new era of lower crude oil prices.

Although it functions as a stable, long-term leasing, finance company, the market views Ship Finance more as a combination of shipping and energy play. The result is a stock with a volatile share price.

The income-focused investor should stay focused on the steady dividends paid by SFL. Of course, when the market pushes the share price lower, it is a great to initiate or add to a position in SFL.

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