Despite missing estimates in its recent quarterly report, Ship Finance International (NYSE:SFL) stock is still very attractive in my opinion. The company generates strong cash flow and pays a generous dividend, currently yielding almost 13%.
Ship Finance International owns and operates vessels and offshore related assets in Bermuda, Cyprus, Malta, Liberia, Norway, Singapore, the United Kingdom, and the Marshall Islands. It is also involved in the charter, purchase, and sale of assets. The company was founded in 2003 and is based in Hamilton, Bermuda.
Source: company's fact sheet
Since the beginning of the year, SFL's stock is down 15.6% while the S&P 500 Index has decreased 2.1%, and the NASDAQ Composite Index has lost 8.2%. Moreover, since the beginning of 2012, SFL's stock has gained only 49.8%. In this period, the S&P 500 Index has increased 59.1%, and the Nasdaq Composite Index has risen 76.4%.
SFL Daily Chart
SFL Weekly Chart
Charts: TradeStation Group, Inc.
Latest Quarter Results
On May 31, Ship Finance International reported its first-quarter 2016 financial results, which missed earnings-per-share expectations by a big margin of $0.13 (20.6%). Revenue for the quarter was $117.6 million, above Wall Street's estimates of $116 million. The company missed earnings-per-share estimates in its last three-quarters, after beating expectations in the previous quarter, as shown in the table below.
Source: Yahoo Finance
Source: First Quarter 2016 Presentation
In the report, Ole B. Hjertaker, CEO of Ship Finance Management, said:
Ship Finance delivers yet another strong quarter, and our fleet renewal and diversification program continues with the recent delivery of two newbuilding container vessels with long term charters to Maersk Line. Our business model has been tested through all market cycles, and we are to our knowledge the only maritime company which has been consistently profitable and paid dividends every quarter the last twelve years. Our key focus remains on prudently managing our balance sheet and our existing asset portfolio whilst sourcing new accretive opportunities through our industry relationships and unique access to deal flow.
In my view, the fact that the company has a substantial backlog should encourage investors. According to Ship Finance, as of March 31, 2016, and adjusted for subsequent sales, the fixed rate charter backlog from the company's fleet of 74 vessels and rigs was approximate $4.2 billion, with an average remaining charter term of 5.2 years, or 9 years if weighted by charter revenue.
The current backlog represents about ten years of the company's actual revenue. Moreover, the majority of the company's vessels and rigs are chartered out on long-term, fixed-rate contracts that provide it with stability in cash flow and earnings.
Source: First Quarter 2016 Presentation
According to the company, The crude oil tanker market remained strong through the first quarter, at levels significantly above the previous quarter. The market has continued at firm levels also into the second quarter of 2016, but market guiding from Frontline is lower than the first quarter. The profit share contribution from the vessels on charter to Frontline came in at $24.7 million in the first quarter, and there are good prospects for a profit share to be also earned in the second quarter.
As for offshore drilling rigs, the market has experienced a dramatic downturn linked to reduced activity following the oil price decline. However, according to the company, its four drilling units generated approximately $51 million in aggregate EBITDA in the first quarter of 2016. All the rigs are chartered out on bareboat charters whereby its customers are responsible for operating costs and maintenance. Moreover, Ship Finance said that it has always focused on rapidly reducing financial leverage on its drilling rigs and has already paid down more than 50% of the aggregate original loan amounts.
An important part of the company's strong earnings come from crude oil tankers charter, which experiences excellent market conditions. According to Frontline (NYSE:FRO), which charters SFL's tankers, record crude production, and oil prices, which are expected to be relatively low, coupled with steadily increasing demand for crude oil, have significantly tightened the crude tanker market and continued to generate strong freight rates. However, there is downside risk for tanker demand relates to a possible decreasing global oil production. Rising oil prices is also a factor which can affect its markets negatively through a fall in oil demand and rising fuel cost for its vessels.
On May 31, the company declared a quarterly cash dividend of $0.45 per share, a 5% growth year-over-year. This is the 49th consecutive dividend; the company has declared nearly $1.7 billion in dividends since 2004 or more than $21 per share. The current annual yield is very high at 12.87%, and the payout ratio is 77.1%. Ship Finance's historical average payout ratio has been approximately 70% to 75% since 2004.
As I see it, the high dividend payment is sustainable at least for the next few quarters. The majority of the company's vessels and rigs are chartered out on long term, fixed rate contracts that provide it with stability in cash flow and earnings, despite fluctuations in the short term charter markets.
Examining Ship Finance's balance sheet, the company had cash and available for sale securities of $198 million at the end of the first quarter and long-term debt of $1,507 million. The total debt to equity ratio was high at 1.39. However, the company generates strong cash flow; price to cash flow ratio is very low at 5.51.
Ship Finance's valuation is excellent; SFL's stock is trading near book value, price to book is at 1.14. The trailing P/E is very low at 6.82, the forward P/E is also very low at 6.86, and the Enterprise Value/EBITDA ratio is low at 9.65.
In addition, SFL's Margins parameters have been much better than its industry median, its sector median, and the S&P 500 median parameters, as shown in the table below.
According to Portfolio123's "All-Stars: O'Neil" ranking system, SFL's stock is ranked second among all 88 Russell 3000 energy stocks with a market cap greater than $1 billion. The ranking system is based on investing principles of the well-known investor William O'Neil. The 20 top-ranked Russell 3000 energy companies according to the ranking system are shown in the table below:
The "All-Stars: O'Neil" ranking system is quite complex, and it is taking into account many factors like; EPS Growth, Sales Growth, Industry Growth, Market conditions and Margins, as shown in the Portfolio123's chart below.
Back-testing over fifteen years has proved that this ranking system is very useful. The reader can find the back-testing results of this ranking system in this article.
SFL's stock is an excellent candidate to be included in a high-yielding dividend stock portfolio. The company is paying a generous dividend yielding about 13% a year, and I believe that the high dividend payment is sustainable at least for the next few quarters due to a substantial backlog, and favorable market conditions. Ship Finance's valuation is excellent; the trailing P/E is very low at 6.82, and the forward P/E is also very low at 6.86. Moreover, SFL's stock is ranked second among all 88 Russell 3000 energy stocks with a market cap greater than $1 billion, according to"All-Stars: O'Neil" ranking system. All in all, In my opinion, SFL's stock is a good value at the current price.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SFL over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.