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Time to Look at Shipping Stocks

Given the uncertain outlook for the U.S. economy, this might be a good time to consider shipping stocks, that is, companies that operate ocean-going cargo vessels.

Ship operators generally fall into two general categories, oil tankers, and dry bulk shippers.

While you already know what oil tankers do, dry-bulk might be an unfamiliar term. Dry bulk cargo is iron ore, grain, steel, and most other items that you’d want to ship except for crude oil, natural gas, and gasoline.

Ship operators charge by the day. The day rates, subject to the balance of supply vs. demand, are notoriously volatile. Since operating costs are relatively fixed, profits skyrocket when rates are high and can turn to losses when rates drop.

Growing Demand
Spurred by the rapid growth of emerging economies in China, India, Latin America, and elsewhere, the demand for shipping capacity has soared, pushing day rates and ship operators’ profits up. However, in boom times, operators usually keep expanding their fleets until supply exceeds demand, and day rates drop.

In recent weeks, oil tanker rates have dropped while dry-bulk day rates have soared. Consequently, although both categories have enjoyed share price increases so far this year, dry-bulk shippers have been the stars. But that doesn’t mean that you should dump your tanker stocks in favor of dry-bulk shippers. Some say that dry-bulk rates have gone up too far, too fast, and further, oil tanker rates are probably headed back up.

Dividends Make It Work
What makes shipping stocks attractive to me, is that many pay hefty dividends equating to yields in the 5% to 10% range, and sometimes higher. Those dividends add significantly to returns, and tend to cushion share price drops when the overall market heads down.

Start With Capital Link
Capital Link Shipping (shipping.capitalink.com) is a good place to get up to speed on the industry. Capital Link, a New York-based investor relations firm, runs the free site. Its homepage lists all U.S. listed shipping stocks, by category, such as dry-bulk or oil tankers. So far as I know, it’s the only place on the Web or anywhere else that provides such a list.

Capital Link’s Company Profiles page shows a short description of each firm’s business. From there, you can also access stock price data and recent news stories. That information, however, is nothing special and not as complete as you’ll find on sites such as Yahoo! (finance.yahoo.com) and MSN Money (moneycentral.msn.com).

What is special on Capital Link’s site are its Industry Reports, Articles, Media Interviews, and Events sections.

Industry Reports include detailed weekly analyses of events in the dry-bulk and tanker industries provided by several different research firms.

The Articles section has articles taken from trade magazines, or sometimes the complete issue of a magazine. The information is useful, but, at least when I looked, was two or three month’s old.

The Media Interviews section includes a dozen or so five to 10 minute audio interviews with company CEOs. Those interviews are good for background on each company’ business plan, but don’t expect a CEO to give you a balanced view of a firm’s plusses and minuses.

The Events section allows you to sit in on presentations that shipping firms have given at recent investor conferences. Similar to the CEO interviews, that’s useful information because it helps you understand a company’s business, but again, don’t expect a balanced view.

Taken together, Capital Link’s reports, articles, interviews and presentations provide much more information on the shipping industry and its major players than you could hope to find anywhere else, at least for free. If you’re serious about investing in ocean going shipping stocks, plan on spending several hours on the site. When you’re finished, you should know whether you want to focus on dry-bulk carriers, on oil tankers, or if you like both categories.

As good as it is; Capital Link’s information isn’t sufficient to make investing decisions. As I said earlier, I prefer shipping stocks that pay significant dividends, and Capital Link doesn’t provide any dividend data.

Continue Research on Yahoo
Yahoo is a good place to research dividend stocks. Start by entering a ticker symbol to display Yahoo’s Summary Report, which includes the expected next 12-month’s dividends (actually, the last quarterly dividend multiplied by four) and the dividend yield if the firm, in fact, does pay that amount. Dividend yield, by the way, is the next 12-month’s dividends divided by the current share price.

Remember that Yahoo’s dividend yield is based on a firm’s last declared payout. Because oil tanker rates have recently dropped, most tanker stocks will pay lower September quarter dividends than Yahoo indicates (the day rates are expected to increase by year’s end). By contrast, dry-bulk ship day rates are on the rise, so expect those firms to increase their dividends.

I’ll leave it up to you as to what to do with that information. However, since many shippers are expected to pay dividends equating to at least 5% yields, I suggest ruling out any stocks with lower expected yields. Very high yields, say 15%, are unrealistic and reflect problems that haven’t yet been reflected in the numbers.

Next, read Yahoo‘s Profile report, which describes the firm’s business. This is where you will rule out stocks whose main business isn’t chartering out ships, or are not operating in the particular category that you decided to emphasize.

Next, click on Historical Prices and then Dividends Only to see the dividend payout history. Rule out stocks that have only paid three or four dividends, you need to see a longer history. Pay attention to the payout consistency. All ship operators encounter periods when they must cut their dividends, but give preference to those with the most consistent payout history. Also, look for a pattern of dividend growth over the years.

I don’t have room to describe everything you need to know. Spend as much time as you can reading the news and commentary about your candidates. The more you know about a stock, the better your results.
published 9/16/07

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