So, some 10% yield stocks are great, low risk buys, while other 10% stocks are poor, high risk investments!  Some stocks have a greater probability of cutting their dividend whenever their shares are priced at a 10% yield then whenever priced at a 5% yield.

How can you tell the difference, based ONLY on that 10% yield?

I see very high leverage and high payout ratio.

I'd like to know why anyone thinks the FRO dividend is safe. 

Regards,
Russ

Russ,

Good question.

The FRO dividend, as with almost ALL tanker stocks, depends almost exclusively on the daily spot market cost of transporting crude oil.  Here is a sample of a weekly report that discusses this.

Each tanker has a 'break even' daily cost to operate, and those costs are quoted on the various tanker websites.  Basically, if the company receives $X for each day it transports oil, and it's operating costs are $Y, then if X is less then Y, it looses money for that day.  If X is greater then Y, it distributes the excess as a dividend.  Rather, it sums up it's daily gains and losses for the quarter, and mades quarterly distributions.

Some owners lease out their ships on long term charters, at a daily rate above the daily operating cost rate.  These companys tend to pay a fairly steady dividend.  Other tanker companys have most of their ships out on spot rates, so the dividends are more volatile.

All tankers have a high payout ratio.  It does a tanker company absolutely no good to retain earnings to fund newbuilds, which increase the supply of ships.  That would lead to lower spot rates.  Whenever a company wants to add capacity, it will typically use short term debt to fund construction, then issue new equity to retire that debt.  The new ship will have some break even daily operational cost, and the cycle continues.

ElLobo,

 All tankers have a high payout ratio.  It does a tanker company absolutely no good to retain earnings to fund newbuilds, which increase the supply of ships.  That would lead to lower spot rates.  Whenever a company wants to add capacity, it will typically use short term debt to fund construction, then issue new equity to retire that debt.  The new ship will have some break even daily operational cost, and the cycle continues.

 I've read this before, and I might be naive, but it makes no sense to me.  Every company wants to increase revenue, and take market share away from its competitors.  The only way shippers can accomplish this is to build or buy more ships.   

It would be like Walmart saying they do not want to open anymore stores because it would drive the retail prices down on their inventory, or MCD saying they did not want to flood the market with more hamburgers.  That would only work if Target, Costco, Burger King, Wendy's and all the other competitors had the same policy.  It is hard for me to believe the entire Tanker industry is in collusion on this issue.

Furthermore retained earnings are for more than expansion, how about paying overhead and dividends when the company is operating in a weak economy?  How are they going to sustain themselves in a correction without retained earnings?

Personally, it looks like to me, the risk is so high that ownership wants to take as much cash (earnings) off the table as possible as to make their assets as judgment proof as possible.  Nothing wrong with that as long as you understand when the music stops, you may be the one standing with without a chair.

helmut

Russ, I just hate it when you ask a question like that about a company I'm invested in 'cause you know what you're talking about.

OK, let's say the Frontline FRO dividend is not safe.  At least in the sense that most dividend investors look at most companies.

The FRO dividend will be reduced from time to time.  It's happened various times over the last 3-4 years when they've paid out huge sums to investors.  Their dividend is based upon the prior quarter's actual results and if the rates for are down that quarter, then their profits are down and the dividend reflects that.

The FRO dividend could be eliminated for a quarter or two.  There's no law that says revenue in this business must exceed costs.  Could happen.  Probably will again at some point just like it has in the past.  It's a cyclical business as ElLobo points out.

BUT (big BUT here) I don't think the question is about the 'safety' of the dividend in the traditional sense - like for a company that Helmut expects to have ever-increasing revenues and profits.  We KNOW that the revenues and profits of this company and others like it is going to bounce around - demand considerations, capacity considerations, etc.  The recent history of FRO and others dependent largely upon the spot market shows these ups and downs in revenues and profits.

I think the question is - over time - given the business and financial model of a company like FRO, is the dividend investor going to be rewarded.

I think the answer to that question is yes.  Moving stuff over the seas ain't exactly a new play.  This business has been around a while I think we'd all agree.  As long as you want to keep driving that pickup of yours, Helmut, to the drive-in, you're going to need some of that oil that gets here on tankers operated by companies like FRO.  Over time the return on equity of FRO (in the 70-90% range) - both as a result of its leveraged structure and its very high operating margins - means that it has been very profitable.  And the owners receive most of the profits on a quarterly basis.

It is a mistake to think that because it is possible that there could be periods of lower profits that these guys won't be able to sustain themselves.  Some of the very smartest people own and operate these boat companies.  I think the largest shareholder of FRO is from Norway and makes another fortune in the oil rig business.  Significant shareholders in most of these companies are sophisticated and have the ability to either raise additional equity or acquire debt or, if they have to, write a check themselves.

One thing they seem to have in common is a desire to obtain a real cash return, on a regular basis, on their invested dollars.  I like to own a small piece of what they own a big piece of because that's what I want also.

FRO ain't a JNJ or a KMP.  Different animal.  Which, I think, means the metrics and analysis of business risks and rewards needs to be different.

Regards.

Cliff

helmut,

"Every company wants to increase revenue, and take market share away from its competitors."

There is a certain amount of oil to be transported from point A to point B.  There isn't much unique about the Very Large Crude Carrier (VLCC) that NAT owns compared to the one that VLCC owns compared to the one that FRO owns.  Excess capacity decreases the spot rate, hurting everyone, including the company bringing the new ship online.

Nevertheless, the argument you are making really doesn't apply to FRO.  They make their money by being the middleman, between the ship owners, like NAT and VLCC, and the oil owners, like BP, XOM, and so forth.  As I explained in another thread, FRO is making it's revenues from managing the fleet, not by owning the ships.

"It is hard for me to believe the entire Tanker industry is in collusion on this issue."

Go to the yearly report for any tanker company, and they are all well aware of the ships coming online in the next few years.

Remember, my answer was in response to Russ' question on the quality of FROs dividend.  I have tried to give a simple explanation.

"Furthermore retained earnings are for more than expansion, how about paying overhead and dividends when the company is operating in a weak economy?"

Overhead is in the daily cost of operations of a single ship.  Weak/strong economy has absolutely nothing to do with tanker profitability.  It is COMPLETELY supply and demand for crude oil.  So much is produced in places where a tanker is required to take it to market, so many tankers are available in that place, as well as other places.  If too many are available, the spot rate goes down.  If too much oil is available, spot rates go up.

"you may be the one standing with without a chair."

Last year, there was a glut of ships available for the amount of oil being pumped.  FRO actually converted a few ships away from transporting oil, helping to put a floor under the supply side of the equation.

Again, I suggest you go to the link in my first post and click on any of the weekly reports.  They each show weekly spot market rates.  Look at that in response to my simple explanation.

By the way, tell me about the moat of a tanker company.  What other means is there for getting crude oil from a North Sea platform to a Gulf Coast refinary!  Tell me what would cause the music to stop?  8-)

I never said that Tankers were not a viable business.  I just believe they are not as risk free as you suggest, and just because they sport an extraordinary yield, it does not put NAT, FRO, or VLCCF at the same risk level as JNJ, PG, MMM, or XOM.  

Overhead is in the daily cost of operations of a single ship.

Does that mean you see no risk?

When you say,

Weak/strong economy has absolutely nothing to do with tanker profitability.

That statement has an almost eerie echo, "It is different this time." 

Tell me what would cause the music to stop?  8-)

Oh, ElLobo, I won't even mention the Exxon Valdez.  Have you ever heard of The Grandcamp?  If you read the story in this link you will also see the collateral damage done to the High flyer as well.

Although I was not born until about six months later, I have listened to stories about the Texas City disaster all of my life

Obviously you and Cliff have followed and studied the shipping/Tanker industry very closely and I'm sure you will do well, but for me, I don't think I can consider capital preservation or dividends from tankers with the same confidence as stocks such as XOM, PG, JNJ & yes Cliff even MCD. So I will take my chances with what I know.

Cliff, if you ever take a cruise from Galveston you will be able to see oil tankers almost far as the eye can see just waiting their turn to enter the Houston ship channel.  Where the oil industry goes, the Houston economy follows, so you see I'm rooting for your team of Tankers.  Even though I'm more of the Exxon, Halliburton, Shell, Transocean, Fluor, Chevron, Marathon, Weatherford International type of oil investor, we are all in the same boat (pun intended).

helmut