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Oceans of Opportunity

Shares of ship-fleet companies have hit the deck running -- plus they offer high dividends. We see clear sailing for these five small carriers.

If real estate investment trusts could float, they'd be ocean-shipping stocks. REITs that own property returned an annualized 28% the past three years and 19% the past five. But shares of ship fleets did even better, delivering a cool 33% annualized the past three years and 20% the past five -- the result of global prosperity and expanding trade.

Increasingly, liquefied natural gas (LNG) and refined-petroleum products travel great distances. The same is true of coal, grain, steel and iron ore. As a result, ship fleets' cash flows, utilization rates and earnings are strong. The industry is lightly taxed and keeps operating costs under tight control.

Besides fine returns, maritime stocks resemble REITs in other ways. Both offer good dividends. But while most REIT payouts are treated as ordinary income, ship-fleet investors get the benefit of the 15% federal income-tax rate on dividends. And both groups are full of healthy small companies.

Shipping has a buccaneering image, but fleets are now entering into more (and longer) guaranteed contracts with utilities and major energy firms, such as Shell and ExxonMobil. That points to more-predictable cash flows and stable dividends. In addition, many of these companies intend to buy more ships, which should boost their cash flows and let them raise dividends.


Many stocks in this group flattened or fell in the second half of 2005 as the volatile spot, or short-term, ship-rental market tanked, especially in crude oil. Analyst John Kartsonas, of Citigroup, thinks these rates will deflate more over the next year or two, leading to dividend cuts and plunging tanker values. If the world economy also loses steam, you'll see cutthroat rate wars. "When it gets ugly in the shipping industry, it gets really ugly," says Magnus Fyhr, an analyst for Jefferies & Co.

Most experts don't think the global economy or the shipping industry is sinking. To avoid the boom-and-bust cycles, Fyhr says, invest in companies that carry refined products or general cargo (or both) and pursue little or no spot-market business. Using those guidelines, we found five attractive opportunities among the smaller carriers. They tend to trade not on earnings per share but on excess cash flow and the ability to send most of that excess cash to investors as dividends. Given the smallness of our picks (market values range from $340 million to $910 million, which can add to risk), it makes sense to buy the stocks as a package.

Aries Maritime Transport Ltd. (symbol RAMS, $13). This Greek shipper owns seven tankers that carry gasoline and fuel oil, plus five general-cargo containerships. All have multiyear leases, several with built-in rate escalators. Aries, which went public in June 2005 at $12.50 a share, has a policy of paying 100% of its net cash flow in dividends, says founder and chief executive officer Mons Bolin. The annual dividend in the next few years should range from $1.60 to $1.80 per share, putting the yield based on the current stock price at 12% to 14%. The risk in Aries is that shipping rates will be lower when its leases turn over in the next few years. But even if dividends ease, they'll still be substantial.

Arlington Tankers Ltd. (ATB, $22). Headquartered in Bermuda, Arlington just bought two fuel-product ships, expanding its navy to eight -- four crude-oil tankers and four product vessels. It has long-term, fixed-rate leases with Sunoco and ExxonMobil. The whole fleet is contracted through 2008, with some pacts extending through 2011. Arlington went public in November 2004 at $20 and expects to pay 54 cents a quarter in dividends, says Ed Terino, co-CEO and chief financial officer. At that rate, Arlington yields 10%. That's less than the yield of many other tanker stocks, but, Terino says, because Arlington has long, high-quality contracts, it's one of the lowest-risk choices in shipping.


Genco Shipping & Trading Ltd. (GSTL, $17). This coal-and-steel hauler owns 17 bulk ships. About 80% of its capacity is contracted for 2006 and some of 2007, with leases likely to be renewed at rates favorable to Genco. If the company doesn't renew all its leases immediately, that's not dire -- the current spot market in dry bulk cargo is reasonably healthy. Genco, based in New York City, went public in July 2005, at $21 a share. The 60-cent quarterly dividend declared in November, Genco's first, works out to a 14% current yield. But CFO John Wobensmith says the target dividend is 54 cents a quarter through 2007. Available cash flow more than covers the dividend, so it is sustainable. The biggest risk here would be fast-rising global interest rates. Genco's fleet is partly financed with floating-rate debt tied to LIBOR, a benchmark for short-term rates.

Seaspan Corp. (SSW, $20). Citigroup analyst Kartsonas calls this Hong Kong-based containership fleet his best and safest idea. Seaspan's 13 ships carry cars, electronics and other merchandise, much of it to and from China. The firm has agreements to expand to 23 ships by 2007. Seaspan is a 100% contract carrier, with fixed-rate leases that average ten years. It has low debt, predictable cash flow and a commitment to stable dividends. Seaspan's quarterly payout of 42.5 cents per share means a current yield of 8.4%.

Teekay LNG Partners (TGP, $30). Teekay Shipping, one of the largest publicly traded fleets, owns 68% of Teekay LNG, which went public last spring at $22. Teekay LNG has or is building seven LNG carriers and owns eight crude-oil tankers (all with long-term contracts). The company, based in Nassau, says it will have 21 vessels by 2009, mostly LNG tankers. The latest quarterly distribution, which Teekay says is its minimum rate, was 41.25 cents per unit. At $30, that's a 5.6% yield, which seems low. But 80% to 90% of the payout is tax-deferred because Teekay is a master limited partnership. Also, you're trading yield for growth potential. LNG has a bright future, with Russia about to join Indonesia, Malaysia and Qatar as exporters, and India and China lining up behind Japan and Europe as buyers. As the partnership's fleet expands, so will its cash flow and regular dividends. The partnership could also sell ships that increase in value and pass along gains. This is truly floating real estate.