Ship Finance International (NYSE:SFL) just announced its quarterly results on May 31, 2018. The company declared a quarterly dividend of $0.35 per share, payable to shareholders of record as of June 15, 2018. Given the current stock price of $14.25 per share, this equates to an annual yield of approximately 9.8%.
When owning and investing in a high-yielding company such as SFL, the company’s ability to maintain its yield over time is very important. SFL has a very good history of dividend payments, having declared a significant quarterly dividend for the last 57 quarters in a row. The dividend has been lowered and increased repeatedly over time, though, which has contributed to sometimes significant volatility in the price of the stock.
Many people have expressed concern about SFL’s payout ratio. The company had EPS of only $0.24 per share during the last quarter compared to $0.35 in declared dividends. However, the company has been developing relationships with more large corporations that engage in shipping. During the first three months of 2018, SFL reports acquisitions of 15 “feeder size container vessels” as well as the purchase of four large “14,000 TEU container vessels.” These acquisitions are expected to contribute significantly to the company’s net income, which should allow it to maintain its current dividend payments. I would not expect SFL to significantly increase the payout in the next quarter or two, but I do expect continued payouts of about $0.35 per share each quarter.
With a market cap of about $1.5 billion, SFL is generally considered to be a small cap stock, but it comes close to the widely accepted categorization of mid cap ($2 billion). The company receives relatively little analyst coverage and publicity, with the exception of a quick mention by Jim Cramer a few months ago. This lack of coverage should not necessarily be interpreted as a negative thing, though, as the company is in the financial industry and is seen by many investors as “eating your vegetables.” While you are unlikely to impress people at a cocktail party by discussing a company that buys and leases ships, investors in SFL have received an impressive amount of dividend payments over the last 10 years. The company has demonstrated remarkable efficiency in the area of buying large ships and leasing them out for long periods of time. In fact, SFL only has 11 employees! The business of leasing ocean going ships does not require a large workforce, and SFL has demonstrated this from its small headquarters in Bermuda.
The recent acquisitions of ships by SFL have shifted its focus away from oil tankers towards dry bulk, car carriers, and other non-oil vessels. This is likely to result in less volatility, as the charters for tanker ships are generally influenced strongly by the price of oil, tariffs, and trade embargoes. While the price of the stock may not have as many sudden spikes and pullbacks as it did during 2012-2013, the company is likely to experience more consistent earnings going forward due to smoother, more predictable demand for its other types of ships.
SFL issued $164 million worth of convertible notes during the first quarter of 2018. These notes expire in 2023 and are convertible to SFL stock at that time for a price of $18.93 per share. I believe that one can infer management’s expectations for the price of the stock based on this transaction. Accounting for some price adjustments, this is a discount rate of around 5%. That is, if SFL common stock maintains its current dividend payout level, the shares are expected to increase in value by about 5% per year from now through 2023. While 5% per year is hardly exciting, along with an annual yield of 9.8% this equals a very good total rate of return.
It should be noted that many things could occur in the risky world of business that would result in SFL not achieving these price targets. Even if the company’s stock rises just enough to keep up with the rate of inflation, though, as long as SFL is able to maintain its current dividend payouts then the company represents a good opportunity and deserves a place in the portfolios of most dividend focused investors.
Disclosure: I am/we are long SFL.