The tanker sector isn’t a bad place to look for a strong dividend yield. And Nordic American Tankers (NYSE:NAT) is one of the strongest payers in the sector. So what makes this stock so ‘super’ and is this huge yield for real?
What’s going on in the tanker world?
We’ve all seen what’s happening with the attacks on vessels in the Red Sea/Bab el-Mandab. And many of us have heard about drought at the Panama Canal. But what does this mean for the shipping/tanker sector?
It’s an awful irony that many tragic global issues are actually positive for tanker companies. The Houthis are forcing ships to take the long route from Asia to Europe. In some cases, such as the Gulf to the Mediterranean, we’re talking about a 70% longer route around the Cape of Good Hope.
Likewise, the drought on the Panama Canal has become so bad that ship numbers transiting the passage have fallen from around 50 a day to as few as 18. This means tankers either join the back of a long queue, or travel round the southern tip of South America.
All of this means that there’s less available supply of vessels on the oceans. In turn, day rates — the cost of leasing these vessels — are surging, up five-to-10 times versus historical averages.
A supercycle to cash in on
What’s more, there’s a dearth of new vessels coming online. Companies just weren’t putting in the orders during the pandemic. As such, we could be looking at something of a supercycle that will last for the next couple of years. Demand and supply of vessels is hugely out of balance.
The only issue is, Nordic American might not be the very best tanker company to take advantage of this supercycle. While its 20 Suezmax tankers have an average age of 12.6, Scorpio Tankers, with its 39 LR2 vessels — average age of 7.8 years — is in prime position.
The issue for me however, is that within my brokerage, Scorpio Tankers isn’t available to invest in on the Hargreaves Lansdown platform.
That’s because younger tankers, especially more fuel-efficient ones, can target prime contracts — working with the likes of ExxonMobil, Shell, Vitol and others. However, that’s not to say Suezmax tankers aren’t in great demand right now. After all, these are the largest tankers built to pass through the Suez Canal — exactly the type of vessel being re-routed.
The bottom line
We’re expecting to see earnings surge in Q4. That’s because 15 of its 20 vessels operate under spot contract conditions — they benefit from rising day rates — and just five on longer-term leases. And spot prices have really ticked up since October.
With regards to the dividend yield, this stood at 11.5% for the previous year, and analysts think the dividend payout could reach ¢65 this year, suggesting a forward yield of 15.5%. That’s huge and is one reason why I hold this stock.