Is GasLog the Next Dividend Growth King?

Dividend growth stocks have historically been the best performing investments. This article highlights a fast-growing LNG shipper that might just be one of the best dividend growth stocks of the next decade.

Adam Galas
Adam Galas
Jul 17, 2014 at 1:47PM
Energy, Materials, and Utilities

Dividends are hot right now, and for good reason. Between 1968 and 2007 the the top 100 yielding S&P 500 companies outperformed the total index by 28.4% annually; however, as great as high yield is, dividend growth is even better. 

Between 1972 and 2004, those S&P 500 stocks that raised their dividends posted 24.6% better annual performance than the S&P 500 at large and 122% better than those that didn't pay dividends at all. 

GasLog (NYSE:GLOG) represents one of the best LNG shippers in the world and may become one of the best dividend growth stocks of the next decade. For those seeking less growth and higher income, its MLP GasLog Partners (NYSE:GLOP) is also a terrific option for investing in one of the best growth industries of the next half century.

LNG shipping: massive potential
Current world supply of liquefied natural gas (LNG) stands at 281 mtpa (million metric tons per annum), but 110 mtpa are currently under construction in places such as Algeria, Australia, Siberia, and Papua New Guinea. Another 190 mtpa of capacity has been proposed from 20 LNG export projects in America, and with US natural gas production expected to increase 56% by 2040 LNG trade is sure to grow immensely. Chinese demand alone will grow 5.9% annually through 2035, and China and India are planning on tripling their import capacity by 2018.

GasLog: future dividend growth champion

Company/MLP Yield Projected 10 Year Annual Distribution/Dividend Growth 10 Year Projected Annual Earnings Growth 10 Year Projected Annual Total Return
GasLog 1.60% 25.50% 46% 52.70%
GasLog Partners 5.20% 16.31% 13% 15.50%

Sources: S&P Capital IQ, Yahoo Finance

Into this enormous long-term energy megatrend steps GasLog, one of the fastest growing and best managed LNG shippers in the world. GasLog owns 13 LNG tankers with another 10 on order and an option to order two more.

The investment thesis for GasLog and GasLog Partners is built on three things: managerial excellence, industry-leading profitability, and stunning growth potential. 

GasLog may have IPOed in 2012, but it's been in the LNG shipping game since 2001 when it took over managing the tanker fleet of BG Group, the world's largest producer and trader of LNG. 

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Its management team is made up of seasoned industry veterans, with long track records at shipping giants such as Maersk, Teekay Shipping, Teekay Tanker Services, and offshore oil driller Transocean

The combination of a close relationship with BG and an excellent management team results in a distinct growth advantage for GasLog. For example, this past quarter BG sold three of the tankers GasLog had been managing to GasLog for $468 million. Each vessel comes with a six-year charter that provides predictable cash flow for GasLog to grow its dividend or drop down to GasLog Partners. In the future, GasLog may be able to maintain a faster fleet growth rate than its competitors thanks to this beneficial relationship.

In terms of profitability and growth GasLog is among the best in the industry.

  • gross margins of 45.7% vs industry average 18.4%
  • net margins of 29.8% vs industry average 4.9%
  • three year average revenue growth rate 58% vs industry average of 4.8%
  • three year average earnings growth of 79.5% vs industry average -8%
GasLog's future growth will come from two sources: fleet expansion and its MLP, GasLog Partners.
GasLog owns 49.8% of GasLog Partners units as well as a 2% general partner stake and 100% of IDRs (incentive distribution rights). IDRs work by sending an ever-increasing proportion of GasLog Partners' marginal distributable cash flow (up to 50% past a certain distribution level) back to GasLog Partners. This provides an incentive for GasLog to drop down its tankers to GasLog Partners, which currently owns just three vessels.
GasLog's fleet has a 65% EBITDA margin. By selling those profitable ships to GasLog Partners, the MLP's distribution will soar and lead to a torrent of IDR fees to GasLog as well as a growing distribution stream from the 50% stake GasLog owns in its MLP.
Better yet, when GasLog drops down tankers to GasLog Partners it receives cash, assumption of debt, and potentially more units. The sale can be used to finance more tankers, which can then be dropped down to GasLog Partners once long-term contracts have been secured (usually from BG Group). Thus a virtuous cycle is created that fuels the kind of amazing earnings and dividend/distribution growth analysts are expecting over the next decade.
Foolish takeaway
GasLog provides long-term dividend growth investors a chance to invest into an energy megatrend that will last for decades and fuel immense growth of wealth and income. Its seasoned management, close ties with BG group, and industry-leading profitability make GasLog a best-of-breed LNG shipper whose potential for dividend growth is likely to make it one of the best investments of the next 10 years. For those seeking higher income but still hungering for market beating long-term total returns, GasLog Partners offers an amazing chance to get in on the ground floor of what is sure to be one of the best MLP growth stories of the next few years.