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The Shipping Industry is Huge
Shipping things becomes more important as the world becomes
more industrialized. Advanced countries have mined all their local
resources (like oil and iron ore) and must find raw materials further
from home. Advanced economies get productivity gains by becoming specialists
in focused technologies. They manufacture what they do best for they
entire world but they must trade their best for goods that other countries
make better.
Since the world is 3/4 water the movement of raw materials and manufactured
goods must travel by ship from one place to another. There are over
a 1,000,000 large cargo ships in operation and some 50,000 new ships
are added each year. Most of the shipping is done by companies providing
the transport of goods as a commerical enterprise.
From the Review
of Maritime Transport 2008 report from UNCTAD "Greece continued
to be the country with the largest controlled fleet, followed by Japan,
Germany, China and Norway; together, these five countries held a market
share of 54.2 per cent". More important much of the shipping
industry is available to investors either as stockholders (equity)
or bond holders (debt).
Some companies are vertically intergrated and use ships they own and
operate to transport goods they produce. For example Exxon moves oil
from its wells on ships it owns to refineries it owns to produce oil
products it sells at its retail gas stations. Some companies own and
operate ships like a courier servce (think FedEx) moving goods under
contract. Other companies operate ships they do not own or own ships
they do not operate.
Investing in Ship Owners
Sooty's shippers portfolio is a diversified group of companies that
own ships but rent them to others to operate. This is a good place
to start investing since the business model is relatively simple to
understand. They buy a ship which is a huge capital investment so
they usually borrow money which burdens their balance sheets with
large loans. The cash from the rent pays the interest on the loans
and what is left is distributed to the stockholders.
The simplicity comes from the fact the ship owner does not have to
deal with fuel crew crew costs, delivery schedules, customs and excise,
weather and tides, or any other thing that can get in the way of the
smooth operation of a ship. The companies we are interested in just
rent the ship to someone they "trust" (after a lot of research and
background checks) and charge them a daily fee.
Investment Risk
The largest risk is that the company will default on their loans and
the debt holders will force bankrupcy and take over the company leaving
the investors with worthless stock certificates. There are lots of
reasons for a default; interest rates go up overwhelming the rental
income, demand for ships drops so no rental income, the company expands
to quickly and runs out of cash, the company pays out too much in
dividends and runs out of cash.
Even without a default the bond holders can still have a major impact on the dividends
paid. Loan agreements include financial metrics that bond holders use to make sure their
loans are safe. These "convenents" are tested on a regular basis and there are concequences
if the company fails a test. Most of the tests concern either cash position or cash flow
and the most common outcome is that dividends are cut or eliminated until the company
builds its cash reserves so it can comply with the convenent.
For the investor the size of the ship owner's capital assets helps to reduce the risk.
Big owners like big ships take a long time to get into trouble. Since the company can
only hide cash flow problems for a few financial quarters the investor generally has
time to see trouble comming and time to abandon (or avoid) the investment.
Buying Tax Sheltered Stock
Shipping company stocks are listed on exchanges in many countries. If you are
a Canadian and you want to shelter your dividend income from taxation you can only do
with countries that recognize the Canadian registered pension designation. Without this
you will have to suffer withholding taxes deducted before you get your dividends and
you will have to file a tax return in the country with the exchange where you bought
your stocks.
The good news is the US government has a taxation agreement that cross
recognizes Canadian RRSPs, RIFs, and LIFs with US 401Ks (sorry TFSA
are not pension plans and not recognized). Neither country charges
tax on investments held in these pension plans. There are no shippers
listed on the TMX but there are a couple dozen are listed on the NYSX
and NasDaq. These are not American companies and most of them have
headquarters in Greece, Norway, and Bermuda. Nevertheless they are
US listed stocks and therefore covered by the taxation agreement on
pensions.
Choosing a Stock to Buy
Like Income Trusts Sooty has a candidates page for shippers that are
worth investigating. These are not "buy" recommendations. Sooty is
a fellow investor not a financial advisor.
If you are still interested in buying shipping company stocks proceed
to:
Sooty's Table of Candidate Shipper Stocks
If you looking for the Baltic Dry Index and Time Charter Equivalence graphs:
Baltic Dry Index - Graphs and Data
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Investing 101