The last couple of years have been anything but smooth sailing for the shipping industry. Leading up to the great recession, ship production was cruising at a pace that would be short lived. As if the global economic slowdown was not enough to steadily sink profits, an aggressive increase in supply of ships along with declining demand sent shipping companies to the farthest depths of the stock market sea.
It's tough to find anyone that expects this industry to emerge from Davy Jones' locker anytime soon, and for that reason among others, I think it's time to take a serious look at this sector. One name that stands out among the rest is Ship Finance International (SFL) and here is why:
As the economy slowed and ultimately fell into a recession, so did the demand for shipping. Although the global economy has begun to show signs of improvement, the recovery is proving to be fairly methodical. However, one catalyst for a sharper increase in demand for shipping could be the abundance and broader use of liquefied natural gas. As drilling for natural gas continues to expand and as inventories grow, prices will eventually fall, resulting in LNG becoming more attractive for nations who lack the natural resource to import. Many countries are also beginning to look to natural gas as a safer and cleaner alternative source of electricity, another promising sign for shippers of the liquefied gas. Most believe that as this young energy segment further matures, the broader economy will benefit as a result of newly created jobs and goods, which will only further propel the shipping industry.
As long as the shipping industry remains in the brig, the elevated risk of loss will be at the forefront of investors' minds and will continue to keep prices low. Relative to most of their competitors though, Ship Finance International is positioned fairly well in terms of hedging this inherent industry risk. One way that SFL is able to manage this risk is through their highly diversified fleet. Where many shippers rely on their oil tanker businesses for a significant portion of their revenue, SFL maintains dry vessels of multiple sizes, offshore service vessels, container vessels, ultra deep water drilling rigs and other types of vessels in addition to their sizeable oil tanker fleet. Although the industry trend is to be heavily dependent upon the tanker segment, Ship Finance is better equipped to handle stormy seas as a result of their mixed fleet. SFL has been living proof of this concept since they went public in 2004, with the majority of their revenue coming from tanker shipping in their early years, which then moved to the offshore vessel business in more recent years, as the tanker industry turned south.
Ship Finance's chartering approach also allows the company to mitigate a lot of the operational risk that other shippers are forced to sail with. Through chartering, operating expenses which can be difficult to predict and can fluctuate considerably are paid by SFL's clients, while SFL simply charges a chartering fee for using their vessels.
It Pays to Wait
As mentioned previously, by many accounts the shipping industry's slump is expected to last a while longer. With that said, many people may be discouraged from looking seriously at investing in this industry for some time. But if you're like me, you much rather get in at a good price than try to time the market and risk missing out on potential gains, and that's why Ship Finance International is such a great value. Not only is SFL hovering around its IPO price from 2004, but it's currently paying a $1.56 yearly dividend which is a 9% yield! With a yield like that, Ship Finance will unload some serious cash in your portfolio while you wait for the industry to return to glory.
As the global economy continues to slowly recover, and as nations look to reduce their energy costs and carbon footprint, one can only expect the shipping industry to emerge from its sunken slumber. Ship Finance will give you broad access to the shipping industry as a result of their diversified fleet, while also reducing your exposure to major fluctuations that occur in individual and more volatile shipping businesses such as the tanker segment. As institutional investors start to initiate and increase positions in SFL as it hovers around its 2004 IPO price of $15, retail investors may want to consider doing the same. At this point, it's not a question of if Ship Finance will set sail for the promised land, but when, and the 9% yield that it offers will make the journey much more tolerable.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.