Nordic American Tanker – Income and More
Tony Daltorio, The Investment U Research Team
One sector that is extremely sensitive to global economic activity is the international shipping industry.
As the financial crisis turned into a category 5 hurricane last year, it blew the entire global economy off course –and along with it, the shipping industry. The sudden drying up of credit, finance institutions and collapsing trade volumes led to a sharp drop in shipping rates.
Fast forward to today, and we’re now seeing ships being backed-up in Chinese and Australian ports: demand is rising.
If these are indeed signs of a bottom, then we need to look for companies positioned correctly in the right shipping sector. And this is important, because each sector in the shipping industry – container, dry bulk, and oil – is fundamentally different from the others.
While they may all be shipping, the profitability varies greatly from line to line. It’s exactly why we like to focus on the sector with the best fundamentals – oil tankers.
Unlike some other sectors where demand for services has fallen off a cliff, global oil demand and, more importantly, the demand for oil tankers, has been relatively unfazed – it’s down less than 2%.
As far as the supply/demand situation for ships is concerned, the oil tanker market is more seaworthy than other sectors of the shipping industry, and more profitable. Here’s one company that’s positioned to profit from the potential bottom of global shipping and the strong fundamentals in the oil tanker market.
Nordic American Tanker
Bermuda-based Nordic American Tanker Shipping Ltd. (NYSE: NAT) is engaged in the global transportation of oil products. To give you an idea on its growth, in less than 4 years the company’s fleet has grown from 3 to 16 Suezmax oil tankers, which each carry about 1 million barrels of oil.
Nordic American was exposed to the recent falls in shipping rates because it operates all of its ships on the short-term spot market instead of leasing them with longer-term contracts. While this may hurt them in a declining environment, it also means that they can take advantage of a rising price climate best.
One of the biggest reasons why Nordic American is on the top of our short list is because the company has NO net debt. During this age of over-indebted and over-leveraged companies, it is rare to see companies that have no debt like Nordic American Tanker.
While the absence of debt on their balance sheet gives them the ability to weather many pressing market environments, it also lowers the breakeven point on their vessels. The company will make a profit on their ships on any rate above $10,000 a day per vessel.
Typical competitor rates currently hover around $20,000 per day, while many need almost $25,000 per day. Nordic American has a natural advantage in pricing and debt, but that’s not all that makes it such a good investment.
Juicy Dividend
Currently there is a juicy dividend yield on the stock, which makes it ideal for income investors, but more importantly allows us to truly gauge how financially strong this company is. Many investing gurus consider the dividend stream the ultimate barometer of a healthy company.
The company’s dividend payments are part of Nordic American’s unique business model. Their business model combines high dividend payouts with low financial risk – no debt and unused credit lines of $500 million.
It also has an interesting policy of declaring quarterly dividends. The dividend is substantially equal to the company’s net operating cash flow during the prior quarter after reserves.
So far in 2009, the company has made dividend payments of $0.87 and $0.88 per share. Nordic American has now made dividend payments for 47 consecutive quarters which for the shipping industry is remarkable. The recent additions to the company’s fleet, paid for by stock issuance, are expected to increase distributable cash flow by 25%.
The stock of Nordic American tanker has had a rather remarkable performance, particularly if you are an income investor. The company’s stock began the century at $10.75 per share and has paid out $36.18 in dividends during the 9+ years since.
But income investors aren’t the only ones happy with this stock.
Over the past several years, the stock price for Nordic American has ranged from the low $20s to the low $40s. Currently it’s in the middle of that range, at about $32 per share. The stock has recovered from the panic low set in March at $22.41 – which was an absolute steal.
We think it has just as much potential now with the improving market conditions.
Good investing,
Tony Daltorio
- Top 10 Value Traps
- Baltic Dry Index Floats Shippers
- The Baltic Dry Index: A Solid Gauge of Global Economic Health
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July 5th, 2009 at 1:02 pm
Hmm, aren’t you concerned that overbuilding of ships is going to negatively affect NAT?
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