Even as broad markets continue to trade at premium valuations, there are opportunities that exist among dividend and growth stocks. This article will discuss Ocean Yield (OCY, Financial), which currently provides a healthy dividend yield of 8.6%.
The company’s dividends will sustain in the coming years along with potential growth opportunities for the company.
Year to date Ocean Yield stock has moved higher by just 3.9%, and I see this sideways movement as a good accumulation opportunity.
As a brief business overview, Ocean Yield is a ship-owning company with investments in vessels on long-term charters. As of the second quarter the company had a fleet of 37 vessels that includes 15 tankers, seven oil-service vessels, six container vessels and six car carriers.
Strong EBITDA backlog
One of the key reasons to be bullish on Ocean Yield and believe that dividends will sustain is the company’s strong EBITDA backlog. As of the second quarter Ocean Yield had an EBITDA backlog of $2.9 billion (average remaining charter tenor of 11.4 years) that ensures multiyear cash flow visibility.
It is important to note here that the EBITDA backlog comes from strong counterparties. This provides firm backlog visibility. Further, in the recent past, merger agreement for Farstad and Solstad has resulted in a stronger combined entity and reduces the counterparty risk for Ocean Yield.
Companies such as Akastor, Hoegh Autoliners, Navig8 Chemical Tankers and SBM Offshore among others have strong fundamentals and contribute to the order backlog.
Strong fundamentals for growth
As of the second quarter Ocean Yield had cash of $127 million and available drawing facilities of $58 million implying total liquidity buffer of $185 million. Further, if the value of the bonds in American Shipping Co. is considered, the company’s total liquidity buffer comes to $236 million. This provides Ocean Yield with a strong financial buffer for growth.
I wanted to focus on the financial flexibility part as depressed sentiments in the industry have translated into low asset prices, and this provides an opportunity for Ocean Yield to pursue asset acquisitions at an appealing price. With the worst for the shipping industry over, this is possibly the best time to acquire assets for growth.
Ocean Yield has been proactive on the acquisition front, and that’s a key reason to believe that dividend growth for the company will also sustain. In the recent past, Ocean Yield acquired two vessels with long-term charters to Aker BP ASA. This is likely to contribute $12.6 million per annum to the company’s EBITDA. Further, the company also acquired a suezmax tanker with 14 years charter.
Ocean Yield has financial muscles and is well positioned to acquire assets at an attractive price. The company has been consistently increasing dividends on a quarterly basis and that’s likely to sustain in the coming years as well.
Ocean Yield reported EBITDA of $74.3 million for the second quarter, and that translates to annualized EBITDA of $300 million (also considering positive impact of new vessel acquisition).
With interest expense in the range of $60 million to $70 million, the company’s EBITDA interest coverage comes to 4.0. Therefore, even with current debt of $1.4 billion, Ocean Yield has the headroom to leverage for growth.
Risk factor
While I would discuss the risk factor to make the discussion comprehensive, this factor is unlikely to impact the company’s dividend payout or growth in the coming quarters.
One of the key risk factors relates to Dirubhai 1, which is on a firm contract with Reliance in India. Reliance currently contributes to 5% of the company’s EBITDA backlog. The risk factor is that the contract is until September 2018 with Reliance having a purchase option at the end of the charter for a consideration of $255 million.
If the contract is not renewed or the purchase option is not exercised, the FPSO (floating production/storage and offloading) is likely to be idle. New investments have been proposed in India for oil and gas development, and it’s likely that the contract will be renewed. It is also worth noting that industry conditions are likely to improve in the next 12 months and new contract for the FPSO can be relatively easier. I don’t see this as a major concern.
Conclusion
For investors seeking high dividend and steady dividend growth, Ocean Yield is a quality stock to consider. The company has navigated challenging times with increase in dividends and as the industry outlook seems better, I expect the stock to trend higher along with continued dividends.
At current levels, the stock is worth considering for the medium to long term. The company has underperformed year to date, and I see that as a buying opportunity.
Disclosure: No positions in the stock discussed.
