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3 dividend stocks from an interesting sector that offers huge potential but also risk

Mart Poom
13. 5. 2023
6 min read

Shipping is a sector that has much to offer investors. Among other things, it often offers a high dividend and, along with it, great growth. But again, all is not so rosy. The sector has one big catch.

Shipping

The shipping sector is characterised by high volatility and cyclicality, which is linked to globalisation trends and the economic cycle. Ships are significantly capital-intensive machines that have a long payback period.

Ships have a high level of fixed and operating costs, which significantly affects profitability. On the revenue side, shipping companies are dependent on a small number of large customers and have to face intense competition in the market. The share price of these companies is affected by their strong dependence on the price of oil or the demand in the market for containers and other transport services.

A period of a growing world economy brings shipping companies revenue growth from higher tariffs, while a recession pushes them to cut costs, which is difficult to do when you have to feed the behemoth that is a cargo ship. Increasing capacity means the threat of oversupply of ships and pressure for lower tariffs.

Freight shipping is now one of the most important ways of transporting goods around the world. Ships are capable of carrying huge quantities of goods over long distances across oceans and seas, allowing trading companies to move goods to different parts of the world and gain access to new markets.

Size of the container shipping sector. Source

Cargo ships are designed to be able to transport a variety of goods, including containers, oil, gas, coal, iron ore, and other industrial materials. These ships are usually large, sometimes up to several hundred metres long, and have a large cargo capacity. Some of the largest cargo ships are capable of carrying up to 20,000 containers at a time.

Cargo shipping has many advantages. One of the most important is the low cost of transport compared to other modes of transport. However, freight shipping also brings some disadvantages. For example, ships can be prone to damage during storms and other extreme weather conditions, which can result in delays and loss of goods. Also, cargo can be susceptible to theft and piracy.

Overall, cargo shipping is an important part of world trade and the economy and plays a key role in securing international trade and transporting goods around the world.

Specificities of the sector

The shipping sector is dependent on a number of key factors. Crucial is the volume of international trade that demands the transport of goods and raw materials between continents, which positively influences the demand for shipping.

Another critical factor is oil prices, as shipping consumes huge amounts of fuel. Rising oil prices increase the cost of operating ships and make shipping less competitive with alternative modes of transport.

The development of prices of commodities transported by sea, such as minerals, agricultural products, etc., also has a significant impact. The increasing demand for these commodities and their higher prices are motivating companies to use shipping more for their transport. The capacity of ports where cargoes are transferred between ships and other modes of transport can also be a limiting factor. Insufficient port infrastructure capacity can hamper the growth of shipping.

Sector risks

Shipping faces a number of risks. One of the main risks is the cyclical nature of the sector, which is very sensitive to fluctuations in the global economy. This is perhaps the most fundamental point and specificity of the sector. In times of economic downturn, demand for shipping and the volume of maritime trade fall, which has a negative impact on the revenues and profitability of companies in the sector.

Geopolitical factors such as political turbulence, conflicts or the closure of important shipping routes are another major risk. This can disrupt companies' supply chains and cause disruptions in the supply of markets. The possibility of trade barriers such as tariffs or quotas on the import/export of goods by sea is also a risk.

Weather and natural disasters also pose a significant risk. Extreme weather conditions, storms or hurricanes can disrupt shipping, damage cargo and port infrastructure. This leads to delivery delays, financial losses and increased insurance costs for the industry.

This would be the shipping industry as a whole. And now it's time to target specific agents!

Starbulk Carriers $SBLK+0.0%

Starbulk Carriers is a Greek company specializing in the sea transportation of raw materials such as coal, oil, iron ore and other industrial materials. The company was founded in 2006 and is based in Athens.

SBLK
$23.83 $0.82 +3.56%
1 Day
+0.04%
5 Days
+3.51%
1 Month
+8.69%
6 Months
+32.85%
YTD
+10.04%
1 Year
-5.7%
5 Years
+194.62%
Max.
-92.84%

Capital Structure

Market Cap
2.00B
Enterpr. Val.
2.91B
Revenue
949.27M
Shares Out.
84.02M
Debt/Capital
0.43
FCF Yield
16.15%

Valuation / Dividends

P/E
13.31
EPS
1.79
P/S
2.04
P/B
1.20
Div. Yield
6.82%
Div. Payout
90.09%

Capital Eff. / Margins

ROIC
7.38%
ROE
9.30%
ROA
5.73%
Gross
27.42%
Operating
24.84%
Net Profit
18.27%
0
1
2
3
4
5
6
7
8
9

In shipping, the best companies are usually distinguished by the quality of their fleets, including the age of their ships. Newer ships typically require less maintenance and are usually more fuel efficient than older ships. Star Bulk operates three sizes of ships with an average age of less than 10 years, making it one of the most cost-effective dry and bulk operators in the world.

Star Bulk has also wisely invested the windfall profits from rising demand to prepare for the next downturn. The company is on track to triple cash and liquidity from 2019

Matson $MATX+0.0%

Matson's history dates back to the late 19th century, when it was founded to provide a link between the U.S. West Coast and the Hawaiian Islands. Today, it is still one of the major shippers of goods to the U.S. Pacific territories and Alaska. It also offers premium, expedited service between the U.S. mainland and China.

MATX
$116.46 $1.62 +1.41%
1 Day
+0.01%
5 Days
-5.99%
1 Month
-3.05%
6 Months
+32.24%
YTD
+1.76%
1 Year
+71.33%
5 Years
+203.49%
Max.
+11,874.97%

Capital Structure

Market Cap
4.07B
Enterpr. Val.
4.29B
Revenue
3.11B
Shares Out.
34.93M
Debt/Capital
0.15
FCF Yield
7.05%

Valuation / Dividends

P/E
13.97
EPS
8.33
P/S
1.29
P/B
1.69
Div. Yield
1.11%
Div. Payout
14.36%

Capital Eff. / Margins

ROIC
9.27%
ROE
13.53%
ROA
7.28%
Gross
20.60%
Operating
11.59%
Net Profit
10.06%
0
1
2
3
4
5
6
7
8
9

Matson is one of the more diversified companies on this list in terms of ship types, with a fleet of more than a dozen vessels, including container ships, custom-designed barges and combination container ships, and vessels designed to carry cargo such as cars and trucks, and even rail cars. Matson also operates a logistics division that works with customers to route shipments.

Genco$GNK+0.0%

Genco is a dry bulk operator with a fleet of more than 40 ships dedicated to shipping commodities around the world. The company works closely with its customers and provides a proprietary business operating platform to help manage the transportation of iron ore, grain, steel, cement and other dry bulk commodities.

GNK
$19.86 $0.37 +1.90%
1 Day
+0.02%
5 Days
+9.99%
1 Month
+15.87%
6 Months
+40.22%
YTD
+20.01%
1 Year
-1.02%
5 Years
+134.82%
Max.
-93.86%

Capital Structure

Market Cap
845.24M
Enterpr. Val.
927.47M
Revenue
395.28M
Shares Out.
42.54M
Debt/Capital
0.14
FCF Yield
9.67%

Valuation / Dividends

P/E
79.48
EPS
0.25
P/S
2.10
P/B
0.91
Div. Yield
4.87%
Div. Payout
621.11%

Capital Eff. / Margins

ROIC
0.07%
ROE
1.15%
ROA
0.99%
Gross
19.90%
Operating
0.44%
Net Profit
2.75%
0
1
2
3
4
5
6
7
8
9

Genco has long had a reputation as an underperformer, but its management is slowly making progress in convincing investors that it is on the upswing. In early 2021, Genco announced a plan to pay down debt and focus on returning cash to shareholders. In 2021 alone, the company reduced its total debt by about 45%.

Maintaining a high dividend while expanding its fleet and managing debt is challenging, but Genco is one of the best dividend stocks in shipping today.

Do you have a favorite in this sector? And do you invest here at all?

Disclaimer: This is by no means an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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