Mike Larson runs an investment advisory called Energy Stock Alert for Weiss Research, and he’s lately been swamping our email box with promises that his “Major energy recos” are imminent — with the promise that he’s looking for stocks with large yields that also have the potential to double or more in value.
So that sounds lovely, right? It is, at least, a respite from the waves of pundits predicting economic collapse, and I don’t think I’ve written about this particular letter before — so I thought we’d take a look.
(As an aside… do you want to sound smart? Want to build up a newsletter service? Step one: Predict that something terrible is about to happen “in the next couple years.” Doesn’t matter if you’re right or not, or if you miss out on great market gains while you wait for the next bear market (or worse) to come, but people perceive it as prescient and wise and “contrarian” because we’re hard-wired to fear risk, particularly so if we happen to be retirees or near-retirees with a strong memory of the 2001 and 2008 crashes).
The last time I wrote about a piece from Larson was when he was teasing an “almost perfect” stock for his Safe Money Report (which also often warns of crisis), that was in a Friday File piece for the Irregulars back in May that I’ve just opened up for anyone else to read if you’re interested — it was, like today’s piece, a teaser about a high yield stock, though I also went off on a bit of a rant about fearmongering and diversification.
The stock he teased then, Ferrellgas, has a yield just under 8% now and has done OK since May — so what’s he teasing now that has a higher payout? Here’s how he gets us excited:
“This little-known stock pays you an 8.5% dividend yield AND ALSO gives you the potential to more than DOUBLE your money….
“Do you know who’s earning some of the greatest profits in this domestic energy boom?
“Answer: The companies that are getting rich TRANSPORTING all of this new energy to market!
“Think of it: What good is a barrel of oil or a cubic foot of natural gas at the wellhead? It can’t fuel your car. It can’t heat your home. It can’t help to power factories or grease the wheels of commerce.
“It can only do all of that once it’s brought to market through the shipping and refining process.
“And the business of getting oil and gas from Point A to Point B isn’t just huge here in America — it’s global!”
So… another transport company (Ferrellgas was sort of a midstream/transport company too — mostly in propane). More details?
“This company owns and charters a fleet of 70 large ships and other vessels. Those include 24 container vessels, 19 large crude oil tankers, 14 drybulk ships, six offshore supply vessels, and assorted other oil drilling rigs and ships.
“It generates cash flow from the chartering of those vessels to an assortment of oil drillers, shipping firms, and other customers — and pays out handsome dividends with the proceeds. Its current dividend rate is 41 cents per quarter, good for a yield of around 8.5% at recent prices.
“Plus, net income is exploding: In the first quarter, the company reported net income of $40.7 million, or 44 cents per share, up from $18 million, or 20 cents per share, in the December quarter.
“At that rate of growth, investors will be lining up to buy this stock — and to give you the opportunity to multiply your money many times over!”
That’s probably enough to feed the Thinkolator, and I suspect I’ve owned this company in the past, but let’s get a few more clues just to be certain:
“The firm recently delivered a large drilling rig under a new charter agreement, acquired nine container vessels and two dry bulk ships, and took other financing steps to help support ongoing growth. It now has a long-term charter backlog of around $5.1 billion, with an average remaining term of 5.7 years.”
And Larson apparently does not think of this as a “set and forget” investment — though frankly, most investment newsletters don’t do “set it and forget it” anyway … many folks won’t keep renewing a subscription, particularly an expensive one, just to hear “sit tight” every month… here’s what he says:
“I expect this stock to be so volatile right now, I can NOT, in all good conscience, recommend it in a monthly publication.
I must recommend it to members of my Energy Stock Alert service where I can follow it for you daily if need be.”
“Follow it for you daily,” by the way, runs at a $597 annual “list price” for the subscription (“on sale” for $297, naturally), Larson’s monthly newsletter, Safe Money Report, is more like $100 a year.
So what’s this volatile high-yielder? Thinkolator sez he’s recommending: Ship Finance Limited (SFL), a company created by billionaire viking raider John Fredriksen a decade or so ago as a financial engineering partner for his large shipping company Frontline (FRO) — essentially, instead of FRO taking on more debt to expand he sold some of its vessels to SFL, which then leased them back to FRO at below market rates so both sides could book a profit. I think SFL was actually initially created as a spinout of Frontline, which I owned way back then, but I’m not certain — like other financing companies they have grown through equity offerings and through additional borrowings.
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Ship Finance, as a financing company, was designed to get more diversified by taking on other sale/leaseback partners beyond just FRO, which they have done (including some rigs from Seadrill, another Fredriksen company that I’ve owned for a long time), which in turn meant SFL could lever its own balance sheet up further by taking on more debt against a more diversified portfolio of rigs, crude carriers, container ships, bulk carriers and other assets that are operated by several different companies. And like mortgage REITs, they were able to get pretty good spreads — returns on their leased vessels and rigs have been considerably higher than their financing costs, and the heavy depreciation writeoffs that the company can take on their generally long-lived ships means that they can pay out substantially more in dividends than they actually book in profits (much like a MLP does).
I haven’t followed SFL closely in recent years, but they did just agree to sell a few of their older VLCCs that were under charter to Frontline so they are becoming less dependent on the challenging crude oil transport sector (their biggest customer by far, in revenue terms, is Seadrill — their jackup and floating rigs have lease rates far higher than the many container ships or crude carriers SFL owns). They carry a lot of debt, and their counterparties are companies like Seadrill and Frontline that carry even more debt, so there’s obviously some risk — but SFL has a much better looking balance sheet than many of the actual operators in shipping, so they have generally been less risky and less volatile than the shipping operators. That’s not necessarily saying a lot, because the dry bulk shippers and the crude oil tanker operators have been wild (and generally disappointing) investments since they maxed out about five years ago.
You can check out SFL’s latest quarterly presentation here — you’ll fairly quickly see that, like other companies that have John Fredriksen in their DNA, that they don’t so much care about “earnings” … they care about cash flow, and about how much of that cash flow they can send through to the shareholders in the form of dividends. That equals out to about an 8.5% yield at the current share price, and the dividend has gradually been increased since the financial crisis. They do carry a lot of debt, and will continue to take on debt as they finance acquisitions and newbuilding orders to grow the fleet, but they don’t have any worrying looking debt maturities until 2018 and a quick glance at their fleet indicates that most of their assets are on long-term contracts that should continue to outpace the cost of financing those assets.
So there you have it. Shipping is a debt-happy sector, and this is effectively a leveraged banker that knows the industry. I won’t be updating you about the stock with every up or down tick as Mike Larson implies he will, but it’s an interesting way to get a good cash dividend — particularly if you think we’ll see some recovery in dry bulk or crude shipping and if you’re not afraid of collapsing energy prices (if oil or the global economy hit some kind of crash, SFL will almost certainly come down in sympathy and in fear for the health of their counterparties, though the shares probably won’t fall as much as those of their customers). Sound like something you want in your portfolio? Let us know with a comment below.