Nordic American Tankers (NYSE:NAT) is a crude-oil-shipping company listed in the US and offers one of the strongest dividend yields I’ve come across.
It’s often the case that stocks with strong dividend yields aren’t really growing, or operate in fairly slow sectors. Essentially, they’re mature companies that don’t have much need to reinvest in their operations.
While Nordic American’s a mature company, it’s operating in a booming sector right now, and it’s among the best placed to take advantage of a shortage of tankers globally.
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Let’s take a closer look.
Pandemic hangover
During the pandemic, there was a notable dip in tanker ship orders due to several factors, including uncertainty surrounding global economic conditions and fluctuations in oil demand. Moreover, the oil price crash and oversupply further deterred investment in new vessels.
According to Clarkson Research Services, only 32 new tanker orders were placed globally in 2020, down from 77 in 2019. This represents a significant 58% decline year on year. Shipbuilders faced cancellations and postponements of existing orders as shipping companies sought to mitigate financial risks amid those volatile market conditions.
And the repercussions of this are still being felt today. The global economy and demand for hydrocarbon products has recovered, but supply’s lagging because there are fewer new vessels. While many older ones haven’t been retired as planned, they don’t meet the standards and capacity required of many prime clients. Many of these older vessels are members of Russia’s so-called shadow fleet.
Two major events
When tankers get stuck in traffic or have to reroute, this pushes day rates — the cost of leasing the vessels — up. That’s simply because they’re taking more time to reach their destinations and therefore results in a reduction of available supply.
There are currently two major events that are pushing day rates up further. These are drought conditions at the Panama Canal — as few as 18 vessels are crossing the waterway each day, down from around 50 — and the attacks on vessels transiting the Bab-el-Mandeb by Houthis.
This is having a profound impact on supply. For reference, avoiding the Bab-el-Mandeb strait journeying between the Gulf to the Mediterranean increases journey time by 70%. Likewise, vessels waiting to transit the Panama Canal can either remain in a queue for weeks, or travel around South America.
The bottom line
Nordic American operates a fleet of Suezmax tanker with an average age of 12.6 years. This means it’s well positioned to benefit from surging day rates, but perhaps not as much as peers such as Scorpio Tankers which has a younger and more fuel-efficient fleet. The impact of these higher day rates are already visible. Nordic reported profits of $98.7m for 2023, more than six times the $15.1m achieved in 2022.
Moving forward, the company said in late February that 57% of spot voyage days for the first quarter of 2024 were booked at $40,690 per day per ship. “There is a scarcity of our type of ships, leading to strong results“, management noted. Running costs are just $9,000 a day.
Collectively, this points to a healthy dividend and improved performance. Remember, these tankers take years to build and supply will remain constrained for some time. I certainly think it’s one of the strongest dividend stocks out there. Plus, it’s trading at just 7.4 times forward earnings.
