How would you like an asset from one of your investments stuck in the middle of the Suez canal?
Or waiting outside the harbor in Los Angeles?
Following the Ever Given saga, shipping stocks are now back on Wall Street’s radar. The boom of this industry is undeniable. Transporting oil in double-hulled tanks is big business and has been around for decades due to regulatory and economic changes.
But the future growth opportunities of the industry lie in a more niche part of the business.
Natural gas is a resource that is considered to be cleaner and cheaper than fossil fuels. The only drawback is that they need to be transported in pipelines across international borders- a task that is by no means an easy one. To solve this problem, businesses convert the gas into liquid which is then transported in tankers. Often referred to as liquified natural gas or LNG.
In recent years, companies in this once mundane industry are emerging from the dominance of China and India as global industrial powerhouses.
These kinds of high-yield stocks just didn’t exist five or 10 years ago. It really is a boon for income investors who are seeking high yields from these profitable enterprises and not just servicing below-grade debt.
Here’s a look at 3 high-yield shipping stocks that are not stuck in the Suez Canal … or waiting outside a harbor in LA.
Hoegh LNG Partners LP (NYSE: HMLP)
Hoegh LNG Partners stands apart from its competitors for being an FSRU pure play. Floating Storage Regasification Unit (FSRU) is a vital component required while transiting and transferring Liquefied Natural Gas (LNG) through the oceanic channels. It is essentially a special type of ship used for LNG transfer. Hoegh remains the largest provider of FSRUs on the market today.
HMLP operates FSRUs, LNG carriers, and LNG infrastructure assets under long-term contracts with an average length of 8 years. The two major regions of activity are Asia and Europe with some exposure in South America. The company owns three vessels outright and 50% of two more. The life of these vessels ranges from 5 to 12 years.
As for the earnings, HLMP’s performance in 2020 vs 2019 was quite strong despite a global pandemic. Revenue YOY was down 1.54% to $143.1 million but direct cash flow (DCF) increased by 10% aided by the company’s long-term contracts. EBITDA was also up 3.84% between 2019 and 2020. Although several companies cut common distributions last year, HLMP maintained its high yield of 10.95%. This is a testament to the company’s ability to withstand periods of high volatility.
Overall, HMLP’s long-term contracts and strong financials make this tanker stock a steady play. The company may experience short-term volatility, but the dust should settle once we put the pandemic behind us.
Teekay LNG Partners LP (NYSE: TGP)
Teekay LNG is another smart tanker stock play on the market right now. In addition to a high dividend yield, the company has a diverse portfolio of operations. TGP’s services include floating, storage, and regasification units (FSRU) and floating liquefied natural gas (FLNG). This extensive range of solutions has enabled Teekay to be adaptable and flexible in a volatile market environment.
A major reason for TGP stock’s favorability is its performance this year. In its last earnings report, the company reported net income at $234 million and EBITDA at $758 million. Both values were the highest recorded earnings in its 16-year history. This is largely a result of Teekay’s long-term fixed contracts that keep its cash flow steady. The fixed contracts percentage of the carriers is 97% for 2021.
In terms of outlook, there is good reason to remain optimistic about TGP’s future growth. With contracts that have an average period of 10 years, the company should see little to no volatility in its short to mid-term financials. Demand for natural gas in Asia is also expected to rise by 40% by 2040 which cements TGP’s long-term growth prospects as well.
Teekay’s diverse operations and long-term contracts make this stock a great buy in any market environment. The company’s 8% dividend yield also makes it an attractive play for income investors. TGP recently announced a 15% increase in its dividend, bringing the quarterly dividend /share to $0.2875.
Dynagas LNG Partners (NYSE: DLNG)
Dynagas LNG is a great buy for income-focused investors. In a world where finding stocks that offer a high yield can be a challenge, DLNG offers a dividend payout of 11% which is up 4.95% from the previous quarter. In its latest earnings report, the company increased its EPS from $0.21 to $0.22. Dynagas is an LNG shipper that maintains 6 vessels and transports natural gas from Norway to Japan, China, and South Korea. With the demand for natural gas expected to rise DLNG stands to gain from this growth trend.
As for the financials, Dynagas reported net income of $10.6 million (91% increase) and adjusted EBITDA of $24.4 million. According to management, the strong results can be attributed to lower finance costs and higher voyage revenues. Another major reason for its continued success is the long-term contracts that have an average tenure of 7.5 years. According to the company it has an estimated revenue backlog of $1.1 billion which will add to the seasonal demand for LNG shipping in the second half of the year.
Dynagas’ financials and growth potential remain strong. The only burden on the company is the age of its fleet which is 10.6 years on average. However, when the time does come for DLNG to replace its fleet, it will be in a much better financial position. So as long as the company is able to pay off its debt and maintain a strong liquidity position, I don’t see any short or long-term challenges. Its high dividend yield is also a major attraction, especially in today’s volatile markets.
If you’re looking for a slow and steady high yield income play in a booming economy, start shopping these shipping stocks.
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