If you’re looking for eye-popping dividends, there’s little need to look beyond the shipping sector. Many of these small-cap seafaring stocks are currently priced at under $5 and boast double-digit dividend yields — some listed as high as 41%. (That’s not a typo.)
But in the investment world, it’s always wise to remember that when someone offers to sell you a diamond for 10 cents, you might end up owning a “diamond” that isn’t worth a dime.
Despite the fact that commodity demand boosted many shippers’ revenues in the second half of last year, shipping stocks — particularly in the dry-bulk sector — had a heinous 2011. And because of the serious problems facing the sector, 2012 is unlikely to be a whole lot better for many dry-bulk carriers and tanker companies. Those problems include:
A Worsening Global Glut of Cargo Vessels
During the cargo-shipping Golden Age, from 2006 to 2008, ship owners contracted for hundreds of new state-of-the art, super-sized dry-bulk container ships and tankers. Then the economy soured, and cargo volumes plummeted. By 2010, those ships were emerging from shipyards into a vastly different market that already had too many ships chasing diminished capacity demand. Even though many shipping outfits canceled deliveries on new ships last year, the fleet still increased by 20%. And a whole new wave of ships began to be delivered this month.
Charter Rates Are Plummeting — Again
Daily charter rates for the largest dry-bulk ships have hit a reef in the past six weeks. Rates for super-sized Capesize ships, which are typically used for commodities such as coal and iron ore, have fallen from nearly $33,000 a day in mid-December to just over $13,000 a day this week. That’s about $7,000 a day less than it costs to operate and finance the average Capesize vessel.
A Slowdown in China’s Economy
China’s robust demand for steel has been keeping the global shipping market afloat, but new signs that the nation’s white-hot economic growth is cooling have sent tremors through the sector. Chinese steel production, which drives global iron-ore shipments, has been falling for the past six months. That’s a bad omen for the dry-bulk sector, which gets a little more than half its revenue from iron-ore shipments.
Oil Consumption Is Slipping
Although this week’s EU decision to enforce an oil embargo against Iran might give tanker rates a bump, the benefit is likely to be short-lived. Oil demand is still sliding downward — particularly in Europe, which is battling a tough economy.
That’s why shipping companies with dividends that look great on paper might have a hard time sustaining them this year.
Here are three high-dividend shipping stocks that are unlikely to live up to investors’ lofty expectations:
DHT Holdings (NYSE:DHT). This company, which leases double-hulled tanker ships on long-term charters, lists a current dividend yield of 41.7%. Unfortunately, its one-year return is -82.5%. With a market cap of $51 million, the stock is trading at around $0.80 — about 20% above its 52-week low in December. The upside: DHT has an earnings growth rate of nearly 80%.
Star Bulk Carriers (NYSE:SBLK). This company, which owns and operates a dry-bulk carrier fleet that hauls major commodities such as iron ore and coal, lists a current dividend yield of 19.2%. The stock’s one-year return, however, is -56%. With a market cap of $83.6 million, the stock is trading at around $1 — about 18% above its 52-week low last month. SBLK has an earnings growth rate of -122%.
Teekay Tankers (NYSE:TNK). Teekay, which owns and operates a fleet of Aframax and Suezmax oil tankers, lists a current dividend yield of 17.6%. The stock’s one-year return is -55%. With a market cap of about $285 million, TNK is trading at around $4.70 — about 40% above its 52-week low in December. It has an earnings growth rate of -60%.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.