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Investing in Shipping Companies

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The Shipping Industry is Huge

Shipping things becomes more important as the world becomes more industrialized. Advanced countries have mined all their local resources (like oil and iron ore) and must find raw materials further from home. Advanced economies get productivity gains by becoming specialists in focused technologies. They manufacture what they do best for they entire world but they must trade their best for goods that other countries make better.

Since the world is 3/4 water the movement of raw materials and manufactured goods must travel by ship from one place to another. There are over a 1,000,000 large cargo ships in operation and some 50,000 new ships are added each year. Most of the shipping is done by companies providing the transport of goods as a commerical enterprise.

From the Review of Maritime Transport 2008 report from UNCTAD "Greece continued to be the country with the largest controlled fleet, followed by Japan, Germany, China and Norway; together, these five countries held a market share of 54.2 per cent". More important much of the shipping industry is available to investors either as stockholders (equity) or bond holders (debt).

Some companies are vertically intergrated and use ships they own and operate to transport goods they produce. For example Exxon moves oil from its wells on ships it owns to refineries it owns to produce oil products it sells at its retail gas stations. Some companies own and operate ships like a courier servce (think FedEx) moving goods under contract. Other companies operate ships they do not own or own ships they do not operate.

Investing in Ship Owners

Sooty's shippers portfolio is a diversified group of companies that own ships but rent them to others to operate. This is a good place to start investing since the business model is relatively simple to understand. They buy a ship which is a huge capital investment so they usually borrow money which burdens their balance sheets with large loans. The cash from the rent pays the interest on the loans and what is left is distributed to the stockholders.

The simplicity comes from the fact the ship owner does not have to deal with fuel crew crew costs, delivery schedules, customs and excise, weather and tides, or any other thing that can get in the way of the smooth operation of a ship. The companies we are interested in just rent the ship to someone they "trust" (after a lot of research and background checks) and charge them a daily fee.

Investment Risk

The largest risk is that the company will default on their loans and the debt holders will force bankrupcy and take over the company leaving the investors with worthless stock certificates. There are lots of reasons for a default; interest rates go up overwhelming the rental income, demand for ships drops so no rental income, the company expands to quickly and runs out of cash, the company pays out too much in dividends and runs out of cash.

Even without a default the bond holders can still have a major impact on the dividends paid. Loan agreements include financial metrics that bond holders use to make sure their loans are safe. These "convenents" are tested on a regular basis and there are concequences if the company fails a test. Most of the tests concern either cash position or cash flow and the most common outcome is that dividends are cut or eliminated until the company builds its cash reserves so it can comply with the convenent.

For the investor the size of the ship owner's capital assets helps to reduce the risk. Big owners like big ships take a long time to get into trouble. Since the company can only hide cash flow problems for a few financial quarters the investor generally has time to see trouble comming and time to abandon (or avoid) the investment.

Buying Tax Sheltered Stock

Shipping company stocks are listed on exchanges in many countries. If you are a Canadian and you want to shelter your dividend income from taxation you can only do with countries that recognize the Canadian registered pension designation. Without this you will have to suffer withholding taxes deducted before you get your dividends and you will have to file a tax return in the country with the exchange where you bought your stocks.

The good news is the US government has a taxation agreement that cross recognizes Canadian RRSPs, RIFs, and LIFs with US 401Ks (sorry TFSA are not pension plans and not recognized). Neither country charges tax on investments held in these pension plans. There are no shippers listed on the TMX but there are a couple dozen are listed on the NYSX and NasDaq. These are not American companies and most of them have headquarters in Greece, Norway, and Bermuda. Nevertheless they are US listed stocks and therefore covered by the taxation agreement on pensions.

Choosing a Stock to Buy

Like Income Trusts Sooty has a candidates page for shippers that are worth investigating. These are not "buy" recommendations. Sooty is a fellow investor not a financial advisor.

If you are still interested in buying shipping company stocks proceed to:
              Sooty's Table of Candidate Shipper Stocks

If you looking for the Baltic Dry Index and Time Charter Equivalence graphs:
              Baltic Dry Index - Graphs and Data