As I’ve noted a few times before, whenever folks start getting worried about a monster bear market or a recession, teasers for investments that have the ring of safety, and particularly including “income” investments, start coming out of the woodwork. This is one from a service I haven’t looked at before, the Financial Intelligence Report … they’d like you to shell out $99 for a year’s subscription, and in exchange they’ll send you a special report called “The Top 3 High Yield Income Stocks for 2008.”
That $99, by the way, is, as we see almost every time, a teaser rate that’s less than the “regular” subscription rate. I suspect that when they use your credit card to renew for you next year, they’ll probably charge you the “regular” price of $199. But that’s beside the point — what are these three high yielders being teased today?
They actually “give away” one of them in the teaser and tell us that the first one is Harvest Energy Trust (HTE), a Canadian Royalty Trust with a 16% dividend yield. That’s nice, but not so unusual among trusts, and most folks who are interested in those have already explored the tax issues and made their own determination about whether these are a risk worth their money — I’m still on the fence about these, personally, but did write a few months back to share a few of my thoughts and ideas on the sector. For the most part, the big movers of these in the near term are the price of natural gas (most of the Canadian trusts, though certainly not all, produce more gas than oil), and investor sentiment about the tax changes (Canada possibly changing the law that will tax them punitively in 2011, or the companies coming public with effective ways of coping with the tax to help remove uncertainty).
But they gave you the name of the company anyway, so you don’t really need the Gumshoe for that one. How about the other two?
The second one is a “Solid, High-Yield Oil Transport Stock.”
The teaser notes, “This company is extremely well run: They operate a fleet of 51 oil tankers (aka Very Large Cargo Carriers, VLCCs). In fact, they’re already running the world’s biggest tanker fleet, and their total shipping capacity is growing fast.
They provide a few other clues:
“Originally founded in Sweden, the company moved its corporate offices to Bermuda in 1997 for tax savings. They outsource most of their crew, ship maintenance, and other service needs to companies that specialize in that area. Thanks to highly competitive bidding, outsourcing further enhances the bottom line and frees management for more profitable use of its time.”
Your favorite Gumshoe actually owned this stock for quite some time (though he doesn’t today), so we needn’t even turn on the Thinkolator to let you know that this company is …
Frontline is the world’s largest operator of VLCC’s, the largest commonly used oil tankers, and it is run by John Fredriksen, a man often described as a “modern day buccaneer” for his wheeling and dealing style and “unrefined” past. While technically the company “Frontline” was a Swedish company when he gained control of it, he had been building his tanker company for years before that and made many more acquisitions after that — Frontline, like Fredriksen, is Norwegian (though it is headquartered in Bermuda for tax reasons … Fredriksen is no friend of the tax man, he himself legally resides in Cyprus even though he’s a famous member at the top of the “richest Norwegian” list and mostly seems to actually live in London).
Frontline is indeed a high dividend yielding stock, but the dividend is not necessarily secure at the 13% teased in this ad — their cash flow depends heavily on good tanker rates, and there are many folks who believe that we’re coming to an end of the super-high tanker rates that have prevailed in recent years. Rates tend to run in a very rocky cycle as ship owners overbuild in hot times and go bankrupt in cold times, so the supply of ships fluctuates fairly widely and, since it takes many years to get space in a yard to build a vessel of this size, it can take a while before enthusiasm for building new ships hits the market with an oversupply of those ships. This cycle was further goosed by the current switchover to double-hull tankers in the wake of the Valdez and other similar spills from single-hull tankers, a switch that is now well underway and, in the industrialized world, nearly complete (most rich countries won’t allow single hull tankers in their ports anymore, or they have them phasing out within the next year or two).
I’m no expert on this company and their current prospects, but I do know that of all the tanker stocks Frontline is probably the best one to ride if you believe that rates will go higher — they don’t own their ships, they lease them from sister company Ship Finance Limited (SFL), so they don’t have that “book value” to fall back on or ships to sell if the market really tears them up in a soft market … but they are asset-light and can dividend out significant cash flow when the market is good and rising (and “selling” those ships to SFL is a large part of how they financed their massive special dividends over the past three years).
That sister company, by the way, is essentially a finance company that buys assets from the operators and leases them back at favorable long term rates, and itself pays a pretty nice dividend and has been hit a bit out of fears that their own financing will be tight and they’ll have a hard time growing their fleet and thus, growing their dividend. If you like the business, there’s probably a good chance that SFL will be more stable than FRO, though not as fun.
SFL, by the way, has also done a couple deals with a drilling company that I own shares of, SeaDrill, also controlled by John Fredriksen — they’re one of the larger operators of deepsea drilling rigs and I’ve written about them before, and even noted that they were teased by Elliott Gue’s Energy Strategist back in August.
So, a high-yielding tanker owner, it’s true … I’d just spend some time researching the oil tanker business and their future prospects, and get yourself comfortable with where rates are going, since that’s also where your dividends will be going, for good or ill. You can count on Fredriksen to pay out much of his companies’ earnings in dividends, since that’s how he pulls cash out of the firms as well, but you can’t necessarily count on those dividends if earnings aren’t there to back them up.
And our final high yielder? It’s a high yielding utility stock, another market darling sector, but time has gotten away from me (sorry!) — I’ll get to that one shortly. Here’s hoping that the market is kind to all in Gumshoe Land this week.
full disclosure: I do own Seadrill shares as of this writing, but none of the other companies mentioned here.