There's no way to sugarcoat this: Investing in the shipping industry is not for the faint of heart. That's doubly so for income investors, because these companies often pay variable dividends that can all but dry up when a storm hits the sector and causes shipping rates to plunge. Take the payout of oil tanker company Nordic American Tanker (NAT 9.96%), which has gone from $0.43 per share to $0.20 per share over the past year due to a significant drop in tanker rates. While Nordic American Tanker has managed to pay a dividend for 77 straight quarters, the rate has been nauseatingly volatile over that time frame.
That said, some companies are better able to navigate these storms than others, which makes their dividends a safer bet. Three top shipping stocks that hold some appeal for income investors are GasLog Partners (NYSE: GLOP), KNOT Offshore Partners (KNOP -0.30%), and Matson (MATX -0.51%). Here's a closer look at what makes them top options in the global fleet.
All locked in
Gaslog Partners was created in 2014 by LNG shipping giant Gaslog (NYSE: GLOG) so it could efficiently recycle capital to buy more boats. What Gaslog does is order new LNG shipping vessels, secure long-term fixed-fee contracts for those ships with customers, and then drop those boats down to Gaslog Partners once they're producing cash flow. As a result of this arrangement, Gaslog Partners generates steadily growing cash flow since 100% of its revenue comes from fixed fees, leaving it unexposed to commodity prices or volumes. Currently, Gaslog Partners owns nine vessels, though Gaslog has 13 more ships available to drop down in the future.
In addition to the steady cash flow from those contracts, Gaslog Partners further solidifies its financial situation by employing relatively low leverage for the shipping industry since its total debt-to-total book capitalization is 53% while net debt-to-EBITDA is 4.1. Meanwhile, the company has maintained a conservative distribution coverage ratio of 1.24 times since its IPO, including 1.34 times coverage last quarter. Because of these factors, the company's dividend, which currently yields 8.7%, appears to be on rock-solid ground.
KNOT Offshore Partners operates a similar business model as Gaslog Partners but with a focus on owning shuttle tankers for oil producers instead of LNG ships. That said, these ships still operate under long-term, fixed-price time charters that throw off steady cash flow. Currently, the company owns a dozen ships that have an average remaining contract duration of five years. Thanks to the stability and visibility those contracts provide, KNOT Offshore Partners pays a very compelling 9.1% distribution these days.
KNOT Offshore Partners also boasts relatively sound financial metrics to support its payout. As of the end of last year, it had a 60% debt-to-total assets ratio and had a well-covered distribution at 1.26 times, with plans to cover the payout by 1.3 times this year. Furthermore, with three potential dropdown transactions with its parent already lined up, the company has clear visibility to continue growing its payout.
Cashing in on Pacific trade
Matson focuses on an entirely different segment of the shipping industry since it owns and operates a fleet of containerships that serve trade routes in the Pacific. That business model doesn't generate quite the stable cash flows as fee-based models provide, which is one reason why Matson pays a much lower dividend that currently yields 2.5%. The other reason its payout is on the low end is that instead of paying out the bulk of its cash flow in dividends, the company only spends about a quarter of its cash flow on the shareholder payout each year. It allocates the rest toward capex and share repurchases. Over the past year, for example, Matson spent 13% of its cash flow on share repurchases and allocated what remained, along with some incremental debt, to make an acquisition and finance the construction of new vessels to refresh its fleet.
One other factor that makes Matson a top stock in the shipping sector is its balance sheet. The company boasts an investment-grade credit rating, backed by low leverage. In fact, the company's net debt-to-EBITDA ratio was just 2.7 last year. Because of that good credit, the company has the financial flexibility to navigate through future storms with ease.
When diving for dividends in the shipping sector, an investor's best bet is to seek out companies that generate stable cash flow from fixed-fee contracts. That's what makes Gaslog Partners and KNOT Offshore Partners two top high-yield options. Meanwhile, another winning strategy is to look for companies that pay out a lower percentage of cash flow and have top-notch balance sheets, which is where we find Matson. By taking a financially conservative approach, these shipping companies should keep their dividends afloat even when those around them are sinking in a storm.