Even with zero share-price appreciation, the 10% yield alone is better than the 8% or so the stock market returns on average annually.
And while double-digit yields can sometimes be dangerous, this is one that's actually worth a further look...
An Inside Look At Hoegh LNG
As a reminder, Hoegh owns floating storage and regasification units (FSRUs). Basically, these are ships anchored off the coast that have been mounted with regasification equipment. In the simplest terms, they turn liquefied natural gas (LNG) back into a usable product, which is then pumped via pipeline to the shore where it can be distributed to utilities or other end users. (The U.S. Energy Information Administration has a good primer on LNG, which you can read here.)
So, when an LNG shipment arrives, rather than docking on land, it just parks next to the FSRU and unloads the cargo. This mobile setup can be ready on site within a matter of months instead of years. And it's highly cost-effective, costing tens of millions annually rather than $10-plus billion to build a permanent onshore terminal.
The Höegh Grace FSRU vessel, source: Höegh LNG
Considering the entire fleet is booked under rental charters through 2025, Hoegh has one of the most predictable income streams around. Just multiply the number of vessels by their respective daily charter rates by the number of days in operation, and you get a pretty good idea of how quarterly revenues will stack up.
There has been minimal expense deviation as well. Vessel operating costs came in at $5.9 million last quarter, compared with $5.7 million a year ago. Administrative expenses were $2.6 million, versus $2.8 million. That means the bottom line has been fairly constant, too. Excluding unrealized gains and losses on interest rate hedging contracts, operating income rose by $1.3 million (5%) to $25.2 million. That modest increase is mostly attributable to one vessel being in drydock for a week or so of scheduled maintenance in the year-ago period (versus perfect 100% on-hire utilization this time around).
EBITDA of $36 million is also little changed from a year ago. That figure gives us a pretty good idea of how much cash the business is generating before the impact of interest and taxes. But we can't just ignore those payments. Hoegh spends about $10 million each quarter on interest payments. If we also subtract taxes and maintenance expenditures, distributable cash flow (DCF) comes in at $18.9 million.
That's a far more important metric, as this is the pool of funds used to pay dividends. Fortunately, the company only needs a scant $15 million to cover its $0.44 per share quarterly distribution (there are only 33 million shares of this tiny partnership outstanding.) That leaves a comfortable dividend coverage ratio of 126%.
Action to Take
Given the strain on existing power plants and tougher regulations hastening the transition from coal to natural gas, global demand for LNG is soaring. As I mentioned to High-Yield Investing readers in my initial recommendation of this pick, the number of countries receiving imports has quadrupled to 40 since 2000.
On a worldwide basis, LNG shipments are forecast to grow from 300 million tons last year to 400 million tons by 2022. And FSRUs are rapidly gaining market share. The Hoegh Gallant and another vessel will be in drydock for a few days next quarter. But aside from that, incoming charter revenues are already on the books for next quarter -- removing much of the guesswork.
That's why I have HMLP remaining a "buy" over at High-Yield Investing. For those of you who don't already own it... if you're looking for the rare 10% yielder that will also allow you to sleep at night, this is definitely worth your consideration.