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Stock Carries a Phenomenal 16.6% Yield |
Published: October 12, 2006
Shares of oil tanker stock
Frontline (NYSE: FRO) are starting to rebound. After bottoming out at
around $30 per share in May, the shares have gained over +30% in the
past few months. Despite the rise, the stock still carries a monster
yield of 16.6% based on Frontline's $6.00 per share dividend.
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The current rally has been
driven by a recent surge in tanker rates for Frontline's very large
crude carriers (VLCCs). Tanker companies like Frontline lease out their
ships to major oil firms in exchange for a daily rental rate. During the
months of July and August, these rates ran about +50% higher than last
year, according
to the company. In fact, rates for July and August topped out at
about $80,000 per day. And going forward, the best might be yet to come,
as the fourth quarter is generally the strongest for tanker firms.
That's when oil demand increases as refineries rebuild their inventories
for the winter.
The latest oil supply/demand outlook also bodes well for tanker stocks.
Chinese oil demand, which grew +2.6% last year, is expected to climb
+6.1% this year and another +5.5% next year, according to the
International Energy Agency. To meet this demand, more large oil tankers
will be needed to ship oil from the Middle East to China.
Meanwhile, single-hull tankers are being phased out to meet
environmental and safety requirements, thereby keeping the supply of
tankers flat. This tight supply/demand situation should keep tanker
rates firm and should support stable cash flows and dividend payouts.
Action to Take: We would not be surprised to see FRO shares rally
as we move into the seasonally strong period of November through
February. That said, investors should remember that VLCC day rates can
be extremely volatile.
Also, while some tanker companies lock in their day rates under
long-term contracts, Frontline leases its tankers according to the going
rate, which changes daily on the spot market. That makes FRO's earnings
and distributions more volatile than most. As such, the stock is
suitable only for aggressive investors who can move in and out of a
position quickly.
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Editor's
Note: Carla Pasternak's model portfolios focus exclusively
on investment opportunities with ultra-high yields. In fact, in each
of her monthly High-Yield Investing newsletters she
provides readers with an entire portfolio of stocks, funds and
preferreds that are delivering annual dividend yields of +10% or
more. That's right -- in order to even be considered for
inclusion in this portfolio, an investment
must deliver cash payments of at least 10% per year. Visit
this link to learn more about Carla Pasternak's High-Yield
Investing newsletter.
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Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Carla
Pasternak draws on a variety of financial backgrounds to make profitable
calls on income-generating stocks for her readers.
Carla has
been employed in the investment industry for more than two decades. In
addition to her work as a writer for several other nationally recognized
financial publishers, her previous experience includes a position as
President of a well-respected investor relations firm. She has also been
writing shareholder reports for public companies (annual reports,
speeches, corporate profiles, slide shows, etc.) since 1980.
A highly
successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select
companies that not only pay rich dividends, but that also have the
potential to deliver strong long-term capital gains.
On the
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not watching the market, she's teaching business courses at the college
level and managing several million dollars in portfolio assets.
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