The super tanker operators have been good sources of dividend income for a long time, but now they may also offer a chance for capital appreciation as well as income. The oil shipping industry has been beaten up over the last few quarters as the price of oil has gone down. The weakened demand for oil has led to decreased demand for tankers and lower rates for shippers. These declines have hurt the revenues for shippers, who reported that the first quarter of 2012 saw declining demand for oil and tanker services. The weakness in earnings has helped to drive the price of these stocks down to five-year lows and attractive entry points for long-term investors.
Teekay Tankers (TNK) owns and operates 9 Afra-Max class oil tankers. The company leases and charters the ships through an affiliate corporation and distributes all of its earnings through dividend disbursements. The last dividend payment of $0.16 per share is an improvement over the last quarter, which was a company low of $0.11 per share. The shipping company has been able to produce positive earnings in light of the downturn in the industry, barely, and is expected to report EPS of $0.01 for the current quarter. Based on this, the stock is richly valued compared to others in the group, with a P/E around 35.
Knightsbridge Tankers, Ltd.'s (VLCCF) most recent dividend payment was $0.35, which produces an annual yield around 16%, an impressive number even after the dividend cut earlier this year. The dividend reduction is somewhat alarming, but the company has a history of regular dividend payments going back nearly 15 years. The dividend is subject to fluctuations and has ranged from a low of $0.25 per share all the way up to $2.00 per share. With the stock price so depressed, it is an attractive play for dividend yield, dividend yield growth and share value growth. This stock has a much more attractive valuation and is currently trading around 6 times earnings. Knightsbridge is also better positioned than Teekay financially, carrying half the debt and producing twice the free cash flow per share of its competitor.
There are some caveats when considering tankers for long-term dividend yields. The downturn in the petroleum shipping market has caused several petroleum shippers to suspend dividends altogether. Overseas Shipholding Group (OSG), one of the world's largest shippers, provides shipping services across a diversified portfolio. The board suspended its dividend at the beginning of 2012 and has not indicated when it may return. Other shippers like StealthGas (GASS) and TOP Ships (TOPS) have not paid dividends in several years. The common denominator here is that all three of these stocks still come up in screens for dividend-paying stocks.
Super tankers are not the only attractive yields in the shipping industry. Box Ships (TEU) is a fairly new issue on the public market and only has a short history of dividend payments. The company is based in Greece and operates internationally, providing shipping through its fleet of container ships and other vessels. The dividend has improved over the past few quarters, doubling from $0.15 to $0.30 per share, a yield of close to 20% at the current stock prices. Box Ships is operating in the green and is expected to earn over $1.00 per share this year. Earnings expectations are basically flat, but we must take into consideration the -12% earnings surprise ratio. The stock is trading near one-year lows and could move lower if it fails to live up to expectations.
There are good returns among shippers and tanker operators, but there are also some risks. The slowing world economy is digging into revenues and profits, which in turn has caused dividends to shrink or even disappear in some cases. Fundamentals are very important when considering investment in this sector. Beware of poor earnings and the possibility of dividend reduction or elimination.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.