I am happy to report that I succeeded in publishing my first Seeking Alpha article entitled “Hot & Spicy Preferred Stocks with Yields between 7.9% and 9.6%”. That was a major accomplishment and I appreciate the editors and others that helped me with that article.
Like many investors, I am always on the lookout for high yields from companies that I consider to be relatively safe and able to show they can support their dividend on a sustainable basis. Because I yearn for higher yields, I generally filter through the dividend growth companies that offer low, but increasingly higher dividends. I usually end up looking at higher risk asset classes such as MLP, CREITS (commercial REITS), MREITS (mortgage REITS) and BDC (business development companies). As luck would have it, there is one other industry that can sometimes provide high yields, but it comes with risk levels that are off the chart. Did you guess the “shipping industry”?
I have ridden that bucking horse a few times with their common stocks, but eventually ate dust enough times to give me a bad taste and a resolve to never return. Over time; however, I forget the pain and began to look at those yields again. Human nature keeps me magnetized to high yields. But this time, I use another tool to in my tool chest to tame that bucking horse. That tool is preferred stocks. Preferred stocks are safer than the common stock of its parent for several reasons. Preferred stocks cannot stop paying the dividend unless they are in real trouble and, even then, not before they stop paying the dividend on their common stock.
That is very important as it provides a buffer or hurdle that must be crossed before the parent company can stop paying the preferred dividend. Then, most preferred stocks have the benefit of being “cumulative”. This means that if they are forced to stop or delay paying the dividend, they must accumulate those missed payments and pay them back to the investor within a certain period of time.
It is not my purpose to analyze each shipping stock, but to bring overall awareness to the industry, the sub-categories and the individual companies within each category. This article will identify the 37 preferred stocks issued by 17 shipping companies in 5 different shipping categories. I will then do a general comparison of each company and stock to show their yields and many of the financial metrics that investors can use to analyze them. Every investor has their own goals and their own investment requirements. I hope that this review will help identify a few sea-worthy companies and preferred stocks that you might be interested in investing in, or at least finding one or more candidates to continue doing further research.
The tables list the parent company first in the yellow and gray row. Directly under each parent are the preferred stocks and ETD securities that they have issued. All preferreds are traditional cumulative issues with par values of $25. The columns provide information and financial metrics to help determine the overall health of the parent company. Let me go over a few of these metrics:
GAAP P&L: The first 2 columns in yellow list the number of years and quarters the company has been profitable in the last 5 years and 5 quarters. This is using GAAP earnings. Keep in mind that Non-GAAP earnings or cash flow may be more important, but all companies must report GAAP so it is an important starting point.
There are 2 sets of numbers. Example is (3) 2 | 2 (3). The first set of 2 numbers indicates the earnings for the last 5 years. The 2nd set of 2 numbers identifies the earnings for the last 5 quarters. The first number in each set is profits and the 2nd number in each set is losses. I then place a ( ) around the result for the last period. So if the last year was profitable, I put the ( ) around the first number. If the last year was a loss, I put ( ) around the last number. So (3) 2 | 2 (3) means that the company had 3 years of profits and 2 years of losses. The last year was profitable. It also had 2 quarters of profits and 3 quarters of losses. The last quarter showed a loss.
Type Payout: This identifies whether or not the payout ratios are determined by GAAP or Non-GAAP metrics. GAAP earnings are identified by EPS (earnings per share). There are a variety of Non-GAAP earnings that companies use, including DCF (distributable cash flow), A EPS (adjusted earnings per share), N EPS (normalized earnings per share) and others. The purpose of payout scores are to determine the ratio of earnings or cash flow to the dividend.
A score of 1 or below tells us that the company is earning enough to cover the dividend. A score of over 1 tells us the company is not earning enough to pay the dividend. That is a warning to investors that a change will have to happen to improve that score. The company will either have to improve their earnings or lower the dividend enough so that earnings are enough to pay the dividend.
3 Payout Ratios: I provide 3 payout ratios. All are based on TTM (trailing twelve month) data. The first is stock dividend payout. This means the ratio is based on the common stock dividend. If the company does not pay a dividend, then there is no payout score. Remember that the common stock dividend provides a buffer for the preferred stock dividend. The company cannot stop or delay the preferred dividend until they have first stopped paying the common stock dividend.
The second payout is preferred dividend payout ratio. This compares the preferred dividend to the earnings that is used to pay the dividend. On the balance sheet, this comes before EPS is determined. This is an important difference between EPS and the earnings used to pay the preferred stock.
The final payout ratio is the preferred dividend to operating cash flow ratio. One of the important functions a company has to do is to create cash flow. The more it provides, the better it is to operate and grow their company. There are several cash flow metrics used to identify this, including operating cash flow and free cash flow. This metric uses operating cash flow to determine the ratio. I consider payout ratios to be one of the most important metrics used to determine whether or not the company will be able to pay the common and preferred dividend on a sustainable basis.
Debt Ratios: There are 3 different debt ratios, including interest coverage, debt to EBITDA and debt to equity. Debt is a very important part of business. The lower the debt, the better able a company can operate in good and tough economic periods. Investors should pay attention to debt. If it is too high, it is a warning to be careful. Companies must incur debt to purchase a ship in order to grow their fleet. A company with high debt may not be able to borrow money to grow the fleet; or if it can, it may be charged higher rates than a company with lower debt.
Metrics involving dividends and yields: If a company pays a common stock dividend, it tells us that the company is earning enough to distribute some to their shareholders. This is good. Without a dividend, there is no yield. The 10 Year median yield metric gives the investor an opportunity to compare the median to the current yield. If the current yield is higher than the median, it gives us a different picture than if it was lower than the median. It may not be important if there is a slight difference, but if there is a large spread, it could provide a clue to their overall health.
If I see that the current yield is much higher than the median, then I logically wonder why is the yield higher now than it averaged over the last 10 years? The 3 Year Average Yearly dividend growth tells us if the company has been growing their common stock dividend or not. Growth is good, negative growth could identify a problem. However, in the shipping industry, dividend cuts may be normal.
The Dividend Diamond metric tells us how many consecutive years a company has increased their dividend 5 or more years in a row. There are 2 shipping companies that are designated as Dividend Diamonds. Can you guess what shipping industry category they are in?
Miscellaneous metrics and info: There are other metrics that I report on at my website, but for this article I only show Price to Book ratio. I won’t discuss it, but readers can review it. I find it interesting that most of the companies have low price to book ratios, which probably means the companies are out of favor right now. There are also other fields in the table, including Float, 15% Tax, Coupon Rate, Call Price, Rating, and K-1. All are important and add to the information investors may want to know.
I break down the metrics analysis into 4 areas: 1. Earnings, 2) Payout ratios, 3) Debt ratios and 4) Dividends. Ok, it is time to review each of the 5 shipping industry categories.
The first shipping category to review is Containerships:
(courtesy of Ipreferincome.com)
There are 3 companies in this category, including Costamare, Inc (CMRE), Global Ship Lease, Inc (GSL), and Seaspan Corporation (SSW). These 3 companies have issued 10 preferred stocks and 2 ETD securities. The average yield for the 12 is 8.22%. This is the lowest average yield for the 5 categories, which logically would identify the lowest risk. GSL has one preferred stock and it has the highest yield of the 3 – 10.3%. All 3 have issues are below par, although SSW also has 3 issues above par. All 3 have shares that have qualified dividends.
Earnings: When I look at the financial metrics, the first thing I look at is GAAP earnings in the first 2 yellow columns. It is immediately apparent that GSL earnings record is lower than the other 2.
Payout ratios: GSL does not pay a dividend so there is not a dividend stock payout ratio. The other 2 have ratios under 1. All 3 have preferred stock dividend payout and Preferred stock dividend to operating cash flow under 1. But remember that 1 is not a great number. We really want to see it lower.
Debt: GSL has the highest debt levels, especially debt to EBITDA. High debt is not good, but if debt is too low it might mean they are not incurring debt to grow.
Dividends: GSL does not pay a dividend so no way to compare the median yield to current yield. SSW has the best comparison of median yield to current yield. Dividend growth is negative or n/a for all 3.
In summary, it appears that GSL has the poorer financial record in the last few years compared to the other 2. However, all 3 are able to pay their preferred stock dividends out of earnings.
The next shipping category for review is Dry Bulk.
(courtesy of Ipreferincome.com)
The Dry Bulk category has 4 companies, including Diana Shipping Inc. (DSX), Scorpio Bulkers, Inc. (SALT), Safe Bulkers, Inc. (SB), and Star Bulk Carriers Corp. (SBLK). These 4 companies have issued 3 preferred stocks and 2 ETD securities. The average yield for the 5 securities is 8.59%. Both ETD issues are priced slightly above par and the remaining 3 preferred stocks are below par with the yields above 9%.
Earnings: As an industry, the profit and loss record for the last 5 years and 5 quarters is not encouraging. SALT has the worst record with 5 years of losses and only 1 quarter out of 5 as being profitable. The best record appears to be SB with 2 profitable years and 4 quarters out of 5 as being profitable.
Payout ratios: The stock dividend payout ratio is discouraging as DSX, SB and SBLK do not pay a common stock dividend and SALT reports a negative payout ratio. The preferred stock dividend ratio provides better news. 2 companies report ratios under 1 and the other 2 have issued ETD (Exchange Traded Debts or baby bonds) so payout ratios are not calculated since baby bonds are debt, not equity. Many investors use the Interest coverage ratio to determine if the ETD interest is covered. It is, but just barely. And finally the Operating cash flow ratios are all positive with ratios under 1.
Debt: Debt to EBITDA ratios are especially high for DSX and SALT. But debt to equity ratios appear to be in good shape, especially for SBLK with a score of .6.
Dividends: 3 of the 4 companies do not distribute a common stock dividend, but they all have 10 year median scores, which means they have all paid dividends in the past. That alone tells us that financial conditions may have been better in the past.
In summary, this industry has some issues that all investors should pay attention to. Past earnings are poor and 3 of 4 do not pay dividends.
The next shipping category to review is LNG (Liquid Natural Gas):
(courtesy of Ipreferincome.com)
There are 6 companies in the LNG category, including Dynaglas LNG Partners LP (DLNG), Gaslog Ltd (GLOG), Gaslog Partner LP (GLOP), Golar LNG Partners LP (GMLP), Hoegh LNG Partner LP (HMLP) and Teekay LNG Partners LP (TGP). They have issued 10 preferred stocks with an average yield of 9.11%. 6 of the 10 are priced below par and the other 4 are above par.
Earnings: Looking at the 5 year, 5 quarter Profit and Loss record is like a breath of fresh air after reviewing the Dry Bulk metrics. 4 of the 6 report 5 years of profits and the remaining 2 report 4 years of profits. The quarterly reports are not quite as good, so it would be good to dig deeper to find out if any issues exist.
Payout ratios: It is important that companies earn enough to cover their common stock dividend. If they don’t, they might eventually have to reduce or stop the common dividend. At this point, GLOG, GLOP and GMLP’s earnings or DCF are not enough to pay the common stock dividend. However, the preferred dividend payout ratio and the preferred to operating cash flow looks good.
Debt: Besides earnings and payout ratios, debt levels are key to a healthy company. Debt-to-equity ratios appear to be in order, but TGP has much higher debt to EBITDA ratios than the other 5.
Dividends: The good news is that all 6 companies pay a common stock dividend and 2 are designated as Dividend Diamonds. GLOP has increased their dividend 6 consecutive years and HMLP has increased their dividend 5 years in a row. Comparing the 10 year median yield to the current yield looks good, although TGP’s current yield is half of the median. Looking back, I see that they cut their dividend in 2/2016 from .70 to .14. Reviewing the dividend growth metric shows 3 companies growing their dividend and GMLP with negative growth.
In summary, the LNG companies appear to be in much better condition that the other shipping industry categories we have reviewed. Past earnings are good, they all pay dividends, the payout ratios are good, especially as it pertains to the preferreds. It makes me wonder why the average preferred stock yield is 9.1%. Could some of the issues be mispriced and provide a buying opportunity?
The next shipping industry category to review is Offshore.
(courtesy of Ipreferincome.com)
There is only 1 shipping company is the offshore category. Teekay Offshore Partners (TOO), is somewhat unique as it provides marine transportation, oil production, storage, long-distance towing and offshore installation, and maintenance for the oil industry. From that description they don’t sound like a shipping company, but they have a fleet of 35 shuttle tankers, 2 chartered-in vessels, 8 FPSO units, 6 FSO units, 10 long-distance towage vessels and more.
Earnings: The 5 year earnings record is poor, but the 5 quarter record is better.
Payout ratios: The company recently cut the dividend to 0, so there is no stock dividend payout ratio. However, the preferred dividend payout and the operating cash flow payout ratios are both good.
Debt: There are no other companies to compare against. But if you compare to companies in the other industry categories, they seem to be fair ratios.
Dividend: Company cut dividend from 1.10 to .01 in 2017 and then to 0 in 2019.
In summary, the metrics generally do not look encouraging; although the preferred payout and cash flow payout are in good shape. In the end, they have enough to cover the preferred dividend. One thing to note about using metrics or history to analyze a company – they don’t tell the whole story. What these metrics don’t tell you is the Brookfield Business Partners (BBU) has recently invested a ton of money into TOO to help them recover and move forward as a thriving company. TOO has 3 preferreds priced below par with yields up to 10.5%. Could these offer another great buying opportunity?
The last shipping industry category to review is Tanker.
(courtesy of Ipreferincome.com)
There are 3 shipping companies operating within the tanker category. It should be noted that the tanker industry is comprised of crude tankers and product tankers. Crude tankers are larger and move crude oil. Product tankers are smaller and generally transport refined product, such as gasoline. These include International Seaways Inc (INSW), Scorpio Tankers, Inc (STNG) and Tsakos Energy Navigation Limited (TNP). These 3 companies have issued 2 ETD (baby bonds) securities and 5 preferred stocks with an average yield of 8.8%. Please note that the 2 highest yields also have floating rates.
Earnings: All 3 report using GAAP earnings and have uninspiring yearly and quarterly results.
Payout ratios: These ratios are also less than inspiring. INSW doesn’t pay a dividend so there is no stock payout ratio. The other two have negative stock payout ratios. The good news is that INSW and STNG have both issued ETD or baby bonds. These are safer than preferreds as they are a debt. Like most debts, they should be paid before other expenses or dividends.
Debt ratios: The 3 debt-to-EBITDA ratios look high.
Dividend: INSW is not paying a dividend and the other two show negative growth.
In summary, there are lots of issues to question. I can see why INSW and SBNA have issued baby bonds as that helps to reduce the risk.
Summary of 5 shipping industry categories.
I have completed a limited review of each of the 5 shipping categories, to include containerships, dry bulk, LNG, Offshore and Tankers. Besides a general look at the companies within each category, I also broke the review down by earnings, payout ratios, debt ratios and dividends. The overall results appeared to suggest at least 4 of the 5 shipping categories as having experienced many challenges over the last 5 years that caused less than stellar earnings and other metrics. Only LNG appeared to have good overall results and metrics during this period.
The 2 highest average yields come from the LNG and Offshore categories with respective averages of 9.1% and 10.0%. I feel that the LNG issues could provide some opportunities as this category of shipping companies has done relatively well over the last 5 years. As the demand for LNG increases around the world, the industry could be poised for growth over the long term. However, there are a few companies within each of the categories that have investment potential, but they should definitely be researched in greater depth than this offered by this limited review. The thing to remember is that the shipping industry provides a great service to the world economy and have many great companies that do a wonderful job of making our lives better.
Disclosure: I am not a licensed securities dealer or advisor. The views here are solely my own and should not be considered as a recommendation. Individuals should determine the suitability for their own situation and perform their own due diligence before making any investment
Disclosure: I am/we are long SSWA, GMLPP, HMLP.PA, TGP.PA, TNP.PD. 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.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.