Tuesday, February 08, 2011

A Tanker Company

We added shares of Nordic American Tanker Shipping (Symbol NAT) to our Growth portfolio in August of 2010.

Why invest in a company that is in a highly cyclical, capital intensive industry with low barriers to entry you might ask?

There is a lot to like about Nordic American's business model:
  • The company has traditionally carried little to no debt giving it great financial flexibility, especially in economic downturns. This is a huge competitive advantage in a capital intensive industry.

  • Its tankers are newer double hulled ships, meaning it does not face the need to replace obsolete tankers.

  • It continues to have access to equity markets where it issues new shares to purchase new tankers. While management of many companies issue shares to fund "Empire Building," Nordic American's management has been very disciplined in using the cash it receives from equity issuance to grow the fleet of tankers.

While the stock price has suffered through most of 2010 due to falling shipping rates, the best time to buy into shipping companies is when shipping rates are down.

Although the company continues to pay a variable dividend based on operating performance, management still continues to have the goal of paying out the majority of operating profits to shareholders.

Think about it: An investor who bought a share of NAT on 9/30/1997 at $18.75 would have received $41.51 in dividends through 2/3/11. Not too shabby a return.

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