Long a darling stock of the high-yield investment crowd, tanker operator Frontline (NYSE:FRO) failed to meet the appetite of its dividend hungry investors when it recently reported its third quarter results. Due to plunging leasing rates for its tanker fleet, the company reported earnings numbers that fell far short of analyst expectations. Net income for the period was $107.8 million or $1.39 a share, well off from consensus expectations of $144 million or $1.85 a share. (For more on analyst expectations, read Analyst Forecasts Spell Disaster For Some Stocks.)

Dividend Drop Disappoints
The biggest disappointment, however, was reserved for those investors who had been counting on Frontline paying out its usually hefty quarterly dividend. The company declared a dividend of only 50 cents per share for the quarter, down drastically from the $3 per share payment in the previous quarter. The shares promptly nose-dived more than 15% on the announcement. (To learn the warning signs, read Is Your Dividend At Risk?)

So, why the dramatic reduction in payout?

Global Recession an Ill Wind For Shipping Industry
There's basically two reasons for the drop. For starters, the global economic downturn bit deeply into the fortunes of the global oil shipping industry. Global consumption is down, as reflected in the dramatic drop in crude prices, and that means volume shipped is down and demand for tankers with it.

The global benchmark tanker leasing rate, known as Worldscale points, has slid dramatically over the past year. From a level of 277 points at the end of 2007, the index now stands at a mere 61.8. Frontline could have minimized the damage resulting from such a sharp drop in rates by contracting its fleet out on a long-term basis at higher fixed rates, but it choose to play the short-term spot market, a strategy that the company now acknowledges was wrong. In contrast, sister company Ship Finance International (NYSE:SFL), which leases ships on a long-term basis, managed to increase its earnings and boost its quarterly dividend.

Major Purchase Commitments Force Cash Conservation
Another reason for Frontline's savage dividend cut has to do with the company's need to meet $300 million in commitments to buy new ships. With credit markets still not yet functioning normally, external funding its still hard to secure, prompting the decision to hoard internal cash by cutting the dividend. Concerns about cash availability and capital commitments in the industry recently prompted, broker JPMorgan Chase (NYSE:JPM) to re-shuffle its ratings on the shipping sector, upgrading to 'overweight' shares of shippers DHT Maritime (NYSE:DHT), and General Maritime (NYSE:GMR) based on the conviction that these companies had sufficient internal cash generating ability to meet their obligations.

The Final Word
Shipping rates could stay depressed for quite some time. Until they recovery, don't expect Frontline to be as generous with dividends as it was in the past.