Tanker Stocks: Tailwinds

The ocean-shipping industry gets little analyst coverage despite its substantial appeal to investors. The world economic boom and generous dividend yields make these stocks terrific choices for investors who seek high income and potentially generous total returns. However, some analysts are fond of warning that this business has its ups and downs. Citigroup's John Kartsonas has been the sector's most cautious observer. He has been predicting since last winter that shipping rates would fall, a forecast that, if accurate, would probably hurt the stocks.

But so far in 2006, Kartsonas has proven to be too conservative. Rates and shipping volumes have held up. So on Wednesday, he boosted 2006 profit estimates on seven of the ten tanker companies he covers, some of them substantially. For example, on Double Hull Tankers (DHT), Kartsonas upped earnings by 17%. He boosted his forecast for General Maritime (GMR) by 12%.

Investors generally value tanker stocks more on cash flow than on earnings. Still, the increased profit estimates are a good sign. The extra profits can come in handy the next time a fleet gets hit with unexpected repair costs. Moreover, the higher profits could give the companies the flexibility to use some of their retained earnings to maintain dividends if their business goes into a cyclical slump. And although some companies will almost certainly keep up their dividends for many years because their ships are tied up in long-term contracts, others lease their vessels on the spot, or current, market. And that means a more volatile, less-predictable earnings stream.

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Two that operate in the spot market are Double Hull Tankers and General Maritime. Both look good for yield hunters. Double Hull, at $15, yields 14% at its current quarterly dividend rate of 53 cents a share. It's been a hit with the stock market since it went public late last year at $12. General Maritime, which trades at $38, yields 15% based on the current quarterly dividend of $1.43 a share. It, too, shows a double-digit total return for the year to date.

Other attractive shipping stocks include Seaspan (SSW), Arlington Tankers (ATB) and Ship Finance Limited (SFL). But if you dip your toes in these waters, make sure to spread your money around several of the fleets. An accident, a lawsuit or another unanticipated problem could lead to a cut in the dividend. That would probably cause the stock to plunge. Meanwhile, as long as global demand for oil remains high and as long as crude must travel long distances by sea, the tanker business should continue to prosper.