Ship Finance Has Been Misjudged

Ship Finance International Ltd. (SFL) has declared a 60¢ dividend for shareholders of record as of December 23. This marks the 19th straight quarter that Ship Finance has maintained or increased its dividend. Based on Wednesday’s closing price the stock carries a hefty 22.6% yield. I am expecting a nice pop in the share price today.

When looking at the numbers for Ship Finance, first ignore the 65¢ per share net income. The structures of its ship leases do not include the profit built into the leases into net income. What is called the operating revenues of $114 million, or $1.57 per share is the free cash flow the company has to pay the dividend, pay down debt or invest in more ships.

Ship Finance has a business model unique in the shipping industry. It leases its ships on long term (15 years is not uncommon) contracts with low debt to value financing and accretive earnings from the 1st day. Its profit sharing agreement with Frontline Ltd. (FRO) allows the company to profit in the volatile spot market without the volatility. See my article on FRO from earlier today.

In my opinion Ship Finance has been seriously misjudged by the market worried over dry bulk indexes and daily charter rates. SFL management has built an earning machine that spits out steady, increasing free cash flow and dividends. This stock should be $30 and yield 8%.

Disclosure: SFL is a personal holding and a component of my site’s hypothetical Income Portfolio.

Comments

[jimmy46:]

yahoo finance has different numbers than what you have,

and they show that debt is 14 times cash flow,

off hand I can't think of a company with that kind of leverage.

How about some more thought as to why you think they can pay their debt and be a $30 stock.

2008 Dec 11 08:14 PM

[jimmy46:]

just looked at DRYS, debt is a little more than 4 times cash flow,
and that's the most volatile of the shippers.

2008 Dec 11 08:16 PM