Is Nordic American Tankers Stock a Contrarian Play for 2021?
The global economy is still being hamstrung by the coronavirus pandemic. And just because COVID-19 vaccines are being distributed, it doesn’t mean things are going to improve anytime soon. New variants of the virus are putting a dent into that optimism.
Amid the uncertainty, the global economy is projected to grow 5.5% in 2021 and 4.2% in 2022. That’s solid, but when you’re looking up from the economic gutter that was 2020, it doesn’t take much to show some improvement. That’s why Nordic American Tankers Ltd (NYSE:NAT) might seem like a contrarian play.
Nordic American Tankers acquires and charters double-hull tankers in Bermuda and internationally. Its fleet of 23 “Suezmax” crude oil tankers is one of the largest Suezmax fleets in the world. (Source: “Fleet,” Nordic American Tankers Ltd, last accessed January 3, 2021.)
Approximately 900 feet long, those are big ships. In fact, they’re the biggest ships that can navigate the Suez Canal, and they can carry more than a million barrels of oil. The ships also cost a lot to charter: about $25,000 per day.
And Nordic American Tankers’ fleet is about to get bigger. Last September, when the global economy was still reeling from COVID-19, the company announced new building contracts for two Suezmax tankers. The vessels are expected to be delivered in the first half of 2022. (Source: “Nordic American Tankers Limited (NYSE: NAT) – Report for the 3rd Quarter – 2020 as a Whole Is Expected to Be a Very Good Year for NAT,” Nordic American Tankers Ltd, November 16, 2020.)
To put the company’s fleet size into perspective, there are currently 531 Suezmax tankers operating worldwide. By mid-2022, Nordic American Tankers will be operating close to five percent of all Suezmax crude oil tankers.
The new contracts are part of the company’s strategy to renew and grow its fleet. Why would it grow its fleet at a time like this? Interestingly, Nordic American Tankers’ Suezmax fleet wasn’t materially impacted by COVID-19. Most of the challenges were related to crew changes and ensuring that the company followed guidance issued by health authorities and international shipping trade associations.
On top of that, for Nordic American Tankers, it’s not necessarily about how much oil it hauls. Rather, it’s about the transportation distance.
The World Economy & the Crude Oil Tanker Market
Despite the economic slowdown, Nordic American Tankers Ltd says it sees far less uncertainty in the market in which it operates. Last November, the company’s management said, “2020 as a whole is expected to be a very good year for NAT.” (Source: Nordic American Tankers Ltd, November 16, 2020, op. cit.)
Management believes the company’s positive fundamentals will continue. After all, what’s good for the global economy is good for the crude oil tanker business. Nordic American Tankers’ long-term position in the tanker market remains robust, with the global pandemic only delaying its progress by months, not years.
Low oil prices are expected to help juice the world economic recovery, and we’ve already been seeing signs of this in Asia. China’s economy, for example, advanced 2.3% in 2020 and was the only major economy to have avoided a contraction. Taiwan’s economic growth outpaced China’s for the first time in 30 years, advancing three percent. All this bodes well for the crude oil tanker market.
Nordic American Tankers Expects its 2020 Results to Be Very Good
2020 will not go down as a banner year, but it will be recorded as a very good year for Nordic American Tankers. You just have to dig a little into the company’s numbers. In the third quarter, the company reported net voyage revenue of $37.2 million, a 15% increase over the $32.3 million recorded in the same prior-year period. Its net voyage revenue was down 60% sequentially. (Source: Nordic American Tankers Ltd, November 16, 2020, op. cit.)
The company reported a third-quarter 2020 net loss of $10.0 million, or $0.07 per share. In the second quarter of 2020, Nordic American reported net income of $49.1 million, or $0.33 per share. In the third quarter of 2019, the company reported a net loss of $13.7 million, or $0.10 per share.
During the 2020 third quarter, the company took several of its ships through drydock, which negatively impacted both net voyage revenue and net profit.
Nordic American Tankers Ltd reported third-quarter earnings before interest, taxes, depreciation, and amortization (EBITDA) of $15.6 million, which was lower than the second-quarter EBITDA ($73.7 million), but up 35.6% year-over-year.
For the nine months ended September 30, 2020, the company’s revenues came in at $217.2 million, an 86.3% increase over the $116.6 million in the same period of 2019.
During the same nine months of 2020, Nordic American Tankers reported net income of $78.6 million, or $0.53 per share, compared to a net loss of $23.0 million, or $0.16 per share, in the first nine months of 2019.
The company ended the third quarter of 2020 with cash and cash equivalents of $62.4 million, compared to $48.8 million as of December 31, 2019.
Short Volumes Sinking
It’s not just Nordic American Tankers Ltd’s management that believes the company has a solid future. Investors are getting more bullish on Nordic American Tankers, too. On December 31, 2020, 8.4 million shares of NAT stock were shorted, but as of January 15, 2021, that number had tumbled 22.3% to 6.5 million. (Source: “Nordic American Tankers Limited (NAT),” Yahoo! Finance, last accessed February 3, 2021.)
Admittedly, Nordic American Tankers stock has not been on fire. But that’s not really a surprise. Investors tend to shun crude oil tanker stocks when the world slips into a global recession and demand for oil plunges. NAT stock has rebounded from the depths of the 2020 stock market sell-off, but it’s still down eight percent year-over-year. On the other hand, Nordic American Tankers stock is up 2.9% year-to-date.
93rd Consecutive Quarterly Payout Announced
Nordic American Tankers has always touted that dividends are a main priority. As such, the company recently announced its 93rd consecutive quarterly payout. (Source: “Dividends,” Nordic American Tankers Ltd, last accessed January 3, 2021.)
For the fourth quarter of 2020, Nordic American Tankers announced a cash dividend of $0.04 per share. As of this writing, the company pays out a yield of 15.2%, with an annual dividend rate of $0.45 and a payout ratio of 69.4%.
Nordic American Tankers has an earnings yield (earnings per share divided by stock price) of 14.8%. Generally speaking, an earnings yield of seven percent or higher is considered good. The company also has a dividend coverage ratio (profits divided by distribution payout) of 72.6%. A dividend coverage ratio of 35% to 55% is considered solid.
Any way you look at it, Nordic American Tankers’ dividend is safe. NAT stock’s trailing annual dividend yield is 14.6%, and its five-year average dividend yield is 10.9%.
Note that the amount of the company’s quarterly dividend tends to fluctuate. That’s because the dividend is based on the company’s net operating cash flow during the previous quarter. In 2020, Nordic American Tankers stock paid out $0.07 per share in the first quarter, $0.14 per share in the second quarter, and $0.20 per share in the third quarter.
The Lowdown on Nordic American Tankers Ltd
NAT stock is a solid marine stock for investors who are seeking a safe, high dividend yield.
A strong balance sheet, combined with a homogenous fleet and economies of scale that give the company a low cash break-even level, enables Nordic American Tankers Ltd to distribute free cash flow to shareholders. This strategy has proven to be lucrative in a strong tanker market. In an improved market, Nordic American Tankers stockholders can expect to receive higher dividends.