Interactive Investor

Ian Cowie: clouds on horizon, but 7.8% yield keeps me on board

Our columnist says this specialist investment trust’s big yield is backed up by strong dividend growth over the past five years. While there are reasons to be fearful, he's continuing to back the trust with a small portion of his ‘forever fund’.

1st February 2024 09:31

Ian Cowie from interactive investor

Ahoy there! How do you fancy 7.8% dividend income, growing by an annualised average of more than 24% over the last five years, priced at a 26% discount to this investment trust’s net asset value (NAV)?

If that sounds too good to be true then beware risks to sentiment include armed drones, pirates and a tanker ablaze on the Red Sea. To be fair to the ship-leasing specialist Tufton Oceanic Assets (LSE:SHIP), none of its 21 vessels has been involved in the conflict near the Suez Canal that is currently hitting the headlines. Nor have they been directly affected by ballistic attacks on the Black Sea that threaten Ukraine’s grain exports.

Dividend distributions provide substantial evidence of how SHIP sails serenely on. It is due to pay 2.125 cents per share at the end of next week (9 February), and joint managers Andrew Hampson and Nicolas Tirogalas report: “With effect from Q1 2024, SHIP’s annual target dividend will be increased by 18% from $0.085 per share to $0.10 per share. Based on this increased target, the company is forecast to have a dividend cover of 1.5 times over the next 18 months.”

Against all that, SHIP and other leasing specialists such as Taylor Maritime Investments Ord (LSE:TMI), face headwinds that include bigger fuel bills now most fleets between Asia and Europe are following the shipping giant Maersk by going the long way round the continent of Africa, rather than risking the shorter route through the Suez Canal and Red Sea.

About 90% of all international trade travels by ship, according to the Organisation for Economic Co-operation and Development (OECD). Before the atrocities of 7 October, about 15% of global trade went through the Suez Canal.

The extra 3,500 nautical miles involved in travelling around the Cape of Good Hope adds another 10 days to the Asia/Europe trip, meaning fewer ships are in port and available to transport goods. Reduced supply is squeezing prices upwards with the Drewry World Container Index, which tracks what it costs to ship a 40ft box between Shanghai and Rotterdam, soaring from $1,500 in December to nearer $4,000 now.

Even climate change seems to be adding to logistical difficulties. Lack of rain in Central America has reduced the supply of fresh water needed to work the locks on the Panama Canal, cutting the number of ships by a third that can pass through this other great choke-point in global exports.

But it is an ill wind that blows no good and rising freight rates are boosting shipping companies’ revenues and supporting high yields. Hampson and Tirogalas reported: “The run rate yield on the fleet is 11.3% after management fees and capital expenditure. The average expected charter length is 1.7 years for the portfolio.”

For example, they cited a specific ship: “We successfully extended the employment of Exceptional with its current charterer for up to three years commencing 1 January 2024.

“The new charter rate implies a net yield of over 15% for the firm extension period which, when blended with the six-month end of the previous charter, will produce a net yield of about 13% for the next two years.”

As the son of a merchant seaman who sailed around Asia in the 1950s, I am also glad to see SHIP express concern for its crews. To be specific, many mariners were marooned onboard for months beyond their contracts during Covid lockdowns but SHIP chair Rob King said: “Only 0.2% of crew members were overdue for relief by more than one month compared to 4.3% for the top 10 ship managers.”

Structural change, as the shipping industry seeks to reduce pollution, may also support capital values. “The investment manager anticipates the investment opportunity for fuel-efficient secondhand vessels to be very strong for the next decade as the shipping industry slowly transitions to zero-carbon fuels to meet tightening regulations and decarbonisation targets.

“The board and the investment manager believe that strong supply-side fundamentals will continue to support high yields and second-hand values, resulting in future returns being higher than the company’s published target.”

Never mind what they say, watch what they do. Research by the stockbroker Investec shows that all four SHIP directors are shareholders, with two of them – including King - holding SHIP stock worth more than the annual fees they are paid to sit on the board.

By contrast, the same research shows that all seven of the Taylor Maritime Investments’ directors are paid higher fees than their counterparts at SHIP but only one of the TMI board has invested more than he is paid in fees - take a bow, Christopher Buttery - while the chair, Henry Strutt, doesn't appear to own any TMI shares at all.

That was a shrewd decision in the short term because TMI has shrunk shareholders’ money by 17% over the last year, even after allowing for its 9.4% yield, according to independent statisticians Morningstar. Meanwhile, SHIP sits 1.4% lower in the water.

So “skin in the game” is no guarantee of success but it does at least mean the board will share ordinary investors’ pain or pleasure. There are dark clouds on the horizon and reasons to be fearful for both SHIP and TMI. But logistical difficulties and restricted supply should continue to squeeze freight rates higher, supporting a dividend yield that floats my boat.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Maersk (MAERSK B) and Tufton Oceanic Assets (SHIP) as part of a diversified portfolio of investment trusts and other shares.

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