So far in 2011 it has been rough sailing for shipping stock investors. The Guggenheim Shipping ETF (SEA) has declined by 24.5 percent since the start of the year. Ship Finance International (SFL) has not declined quite as much and may provide some attractive value to investors for the medium and long term. The Ship Finance International business model is to buy commercial ships and lease them to shipping companies on long-term contracts, with the shipping company picking up the majority of operating expenses as well as making payments on the vessels.
Ship Finance was spun off by Frontline (FRO) and originally owned a fleet composed entirely of crude oil tankers. The company has diversified its fleet and now owns container and drill rig vessels as well as tankers.
Ship Finance has been a steady payer of increasing dividends and the quarterly payout had reached 60 cents per share before the financial crisis. The crisis had minimal effect on SFL's cash flow, but the company cut the payout to build up a cash position. A more lasting effect of the crisis was the stoppage and slow restart of new vessel purchase and finance deals for the company.
For the first quarter of 2011, Ship Finance reported net income of 41 cents per share compared to earnings of 72 cents in the same quarter of 2010. In that first quarter of 2010, 32 cents of the net was the result of selling assets, leaving 40 cents per share from continuing operations.
For the quarter, the Ship Finance board increased the quarterly dividend for the fifth consecutive quarter to 39 cents per share. SFL currently yields 9.49 percent.
Net income per share for SFL underestimates the company's free cash flow. Quarterly EBITDA is consistently over $2 per share each quarter and the company's board is very conservative when declaring a quarterly distribution.
Currently, Dahlman Rose has a buy rating on SFL with a target share price of $25. The analyst reports notes the steadily increasing dividend and expects the distribution increases to continue.
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