Which Shipping Stock Can Sail Further? KNOP or SFL
Stock Analysis & Ideas

Which Shipping Stock Can Sail Further? KNOP or SFL

The shipping industry has had a phenomenal past couple of years. Driven by the persisting logistical bottlenecks created by the COVID-19 pandemic, containership and dry bulk rates have skyrocketed since 2020. As a result, companies in the space have started to pay growing dividends to investors amid record net income levels.

Today we are looking at two high-yield companies whose diversified fleets have historically produced robust cash flows and paid rich dividends, even before the ongoing tailwinds in the containership and dry bulk fields.

UK-based KNOT Offshore Partners LP (KNOP) owns and operates shuttle tankers under long-term charter contracts in the North Sea and Brazil. Specifically, the partnership provides transportation, loading, and storage of crude oil under time charters and bareboat charters. KNOT owns 17 vessels.

SFL Corporation’s (SFL) primary businesses, on the other hand, comprise transporting crude oil and oil products, dry bulk and containerized cargos, as well as offshore drilling activities. It is more diversified in that regard, owning 16 oil tankers, 22 dry bulk carriers, one jack-up drilling rig, two ultra-deepwater drilling units, two chemical tankers, 35 container vessels, six car carriers, and two oil product tankers.

KNOT Offshore and SFL are currently two of the highest-yielding stocks in the shipping industry, yielding approximately 12.8% and 6.7%, respectively.

I am neutral on both KNOT & SFL for the time being.

The Dividend Stories

KNOT Offshore’s DCFU (Distributable Cash Flow per Unit) has hovered between $2.50 and $4.50 since 2013, affected by the charter rates the partnership has been able to achieve with every contract renewal. This is based on the underlying market conditions each time. The dividend per unit grew from 2013 to 2016 and has since been maintained at an annualized rate of $2.08, adequately covered by DCFU.

Moving into 2022, the partnership has a few chartering gaps in a couple of its vessels during the year, as well as scheduled dry docking, which should result in a below-average DCFU. Still, my estimates point towards FY2022 DCFU close to $2.60, which should once again adequately cover the dividend.

SFL, on the other hand, made a bold move in 2020 by deciding to cut the dividend despite it being relatively well-covered at the time in order to finance the expansion of its fleet, which is not unusual in the industry.

Consequently, last year SFL successfully committed nearly $850 million towards accretive investments, whose impacts already appear in the company’s bottom line. Accordingly, the company has now started to grow its dividend again back to its pre-slash levels, as illustrated in the above bar chart. With SFL having exposure to containerships which currently enjoy insanely high rates, the company should be able to generate EPS north of $1.00 this year, implying further room to continue growing the dividend.

Which is the Better Dividend Stock?

KNOT’s dividend yield is nearly double that of SFL’s, which income-oriented investors are likely to find too hard to overlook. However, SFL’s investment case does offer a couple of unique advantages.

Firstly, the company has a diversified fleet, with significant exposure to containership rates which should result in significant earnings growth as the company rolls its charters at higher rates upon renewal in the short to medium term. Hence, SFL’s dividend has notably better growth prospects ahead.

Secondly, SFL’s Liners, Dry bulk vessels, and Tankers had average contract durations of 6.7, 6.4, and 4.8 years, respectively, as of its latest filings. This compares with KNOP’s average remaining fixed duration charter profile of just 2.0 years, which is obviously weaker in terms of cash flow predictability.

Overall, I consider both companies to be of high quality. Investors can combine both KNOP and SFL to gain exposure both in the former’s higher yield and the latter’s better growth prospects. If I had to choose only one, however, that would be SFL, as I believe its investment case offers a wider margin of safety.

Wall Street’s Take

Turning to Wall Street, SFL Corporation has a Moderate Buy consensus rating, based on two Buys and two Holds assigned in the past three months.

At $10.75, the average SFL Corporation stock projections imply 4.47% upside potential.

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