Parts of this post have been redacted due to the author’s wish to remain anonymous.
For those who are bullish on the recovery of global growth, now may be the time to bargain purchase shipping stocks.
There may be some glimmers of light in this gloom and doom scenario. It seems recovery is already underway in India, where companies have recently reported to have started buying coal mines in South Africa and iron-ore mines in Australia due to supply shortfalls.
Although oversupply may cause consolidation, delays, and cancellations in the short term, perhaps the burst of the shipping bubble may bring positive long term results. This is likely to send older ships to the scrap yard, forging fleets which are safer, cleaner, younger, and more reliable.
Many tech analysts believe that the survivors of the bubble burst were the more efficient companies. Perhaps we may apply the same logic here. Overseas Shipping Group, (NYSE: OSG), and Teekay Corporation, (NYSE: TK), actually increased their dividend payments in bad times. Their dividend yields are currently 4.9% and 3.8%, respectively.
This is clearly a depressed industry, but we have seen a few standouts with attractive fundamentals that would be good to own in the long term. These companies display a solid free cash flow yield, a five year dividend growth rate above 15%, and a debt light balance sheet.
We look for a young fleet, ample cash, a strong safety culture, and sharp vessel utilization. We would rather be buyers of shippers exposed to the spot market. Such stocks have probably been hammered under pricing pressures, rendering cheap valuations and lofty dividend yields. Such companies free of bound to a long term time charter may see brighter days when rates recover.
True value investing requires patience, cynicism, and courage. Although the industry faces challenges, for the discerning analyst who can find the diamonds in the scrap yard, shippers present a low cost way to gain exposure to the global recovery.
Disclosure: Sara Grillo, CFA owns shares of Overseas Shipping Group (NYSE:OSG).
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