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This
Stable Shipping Company Sports a 7.4% Yield |
Published:
April 28, 2008
Before the advent of container shipping in the 1950s and 1960s,
shipping goods meant loading individual irregular-shaped items
onto a ship. This proved inefficient, as there was no way to
move many individual items at once, and securing odd-shaped
goods for an ocean voyage took a great deal of time and labor.
Nowadays, items are packed into standard 20 or 40-foot long
containers that can be stacked neatly on the decks of giant
ships. Standardizing containers makes it easier to handle
loading, unloading, and bundling cargo from multiple shippers.
Containerships can carry cargoes as varied as auto parts, consumer
goods and toys all in the same shipment.
Growth in the containership industry was rapid from 2000 through
2006, averaging over +11% annualized. The main driver of that
growth was increased trade globally including, of course, the
shipping of consumer goods from Asian to U.S. and European markets.
Lately, growth in containership volumes to the U.S. has slowed
mainly due to the weakening economy and U.S. dollar; both
factors have slowed U.S. imports. Nonetheless, trade routes
between Asian nations and the Middle East have picked up
markedly and volumes between Asia and Europe remain strong --
these factors have offset much of the U.S. decline.
But despite the almost continuous increase in demand, shipping
rates are seasonal and can be volatile at times. Fortunately, my
pick today, Danaos Corp. (NYSE: DAC, $25.13), has
very little exposure to this volatility because almost all of
its 36 containerships are locked in 8 to 12-year fixed-rate
contracts with major shipping firms. These contracts minimize
the company's exposure to short-term swings in supply and
demand.
And DAC also benefits from a growing trend toward vessel
outsourcing. In other words, shipping firms do not want to shell
out to purchase their own fleet of ships to transport goods.
Instead, they prefer to lease these ships from dedicated
third-party operators like DAC; this trend has allowed DAC to
grow its fleet and sign up new ships under long-term lease
agreements. In fact, the firm has 32 additional ships scheduled for
delivery in the next three years, and the majority of them
already have contracts in the works.
DAC currently sports a dividend yield of 7.4%; there is
little downside risk to dividends due to DAC's long-term charter
deals. And as new ships are delivered and start earning fees,
there's room for DAC to continue boosting its payout.
Danaos offers a strong yield with relatively little exposure to any
short-term weakness in containership traffic to the U.S. That
said, the stock has been unfairly hit by fears that a U.S.
economic slowdown would hurt the containership industry. This
situation has given long-term investors a rare chance to capture
a steadily growing company and a solid dividend yield at
a rock-bottom price.
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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Income Security
of the Month
Our "Income Security of the Month" for May 2008 invests in
a fast-growing overseas market that doesn't get much exposure in the
mainstream financial press. And although it typically makes enormous
annual dividend payments -- it has paid an average dividend of 24.5%
per year over the past five years -- this fund is perhaps most
appealing for its total return potential. Specifically, the fund has
delivered total returns of +297.3% since 2003, and
it ranks in the top 10% of its category over the past decade.
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