A Ship of Yields

By MoneyShow.com | December 26, 2011 AAA

Shipping companies have seen their share of hard times—that is certainly an understatement—but for investors willing to take the risks and the rides, there are still some shippers throwing off huge yields, writes Paul Tracy of High-Yield Investing.

Navios Maritime (NMM) is a shipping firm with a fleet of 18 dry-bulk vessels used to transport commodities such as coal, iron ore, and grains.

Shipping firms like Navios do not take ownership of the commodities they transport. They simply charge companies a fee, known as a day rate, to ship commodities on their vessels.

Ships can be booked either on a spot charter basis (for a short time period at a day rate that varies based on the supply and demand) or under term charters (a fixed rate for a period of several years).

The spot rates for dry-bulk vessels have been depressed in recent months. But the effect of spot charter rates is mainly psychological rather than real, because the vast majority of Navios Maritime’s ships are booked under long-term time charter arrangements.

In fact, 62% of Navios’ ships have a remaining contract duration of six to ten years, and another 9% have a remaining contract duration of three to six years.

Since rates are locked in under long-term deals, Navios’s cash flows are largely locked in over the next few years, and the company should have no trouble covering its payout. With a double-digit yield and little chance of a cut in distributions, the recent dip in Navios represents an excellent buying opportunity.

The main risk facing Navios is that dry bulk shipping rates remain depressed well into 2014, when a larger number of its vessels are due to come off time-charter contracts. If day rates remain depressed, the company would not be able to recharter its ships at anything close to current rates, and would likely be forced to cut its payout.

With an 11.2% yield and locked-in cash flows, Navios Maritime is a buy for investors willing to stomach the volatility in the stock.

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