SFL stock (NYSE:SFL) has sustained an upward trajectory in the past couple of years, with investors chasing the shipping giant’s double-digit dividend yield. In fact, even though shares have marched gradually higher over the past few years, the company’s continuous dividend increases have resulted in SFL sustaining its dividend yield in the double digits (10.3%).
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Consequently, I believe that investor enthusiasm for the stock will likely remain strong, especially when considering SFL’s robust financial performance, supported by multi-year charters, and the fact that its hefty dividend remains well-covered. Hence, I am bullish on the stock.
Leasing Strategy Drives Cash-Flow Visibility, Reduces Uncertainty
SFL employs a unique leasing strategy that is able to provide exceptional cash-flow visibility, thus reducing uncertainty and allowing management to pay a hefty dividend. This aspect is particularly noteworthy due to the potential skepticism some investors may have toward SFL’s impressive double-digit yield. Often, a high yield could raise concerns about the sustainability of the underlying dividend. Nevertheless, this isn’t the case for SFL.
How It Works
Basically, SFL does not engage in the operation of its own vessels. Instead, it chooses to lease them out for extended periods. In particular, at the end of Q1, the fixed rate charter backlog attached to SFL’s fleet of 74 vessels and the currently under construction “newbuildings” was around $3.7 billion. That $3.7 billion is also spread over a weighted remaining charter term of 6.3 years, providing SFL with exceptional cash-flow visibility over an extended period of time.
Overall, the positive aspect of this strategy lies in the guarantee of consistent and predictable cash flows, regardless of the volatile fluctuations in spot rates across different asset categories. Conversely, this approach may cause SFL to forgo potentially lucrative opportunities. For instance, during the pandemic, dry bulk rates soared to unprecedented levels, yet SFL’s dry bulk ships were already committed to long-term leases. A similar situation is currently developing with SFL’s tankers, which are bound by fixed rates while the spot market experiences a surge.
In any case, the result of this setup is that SFL’s performance tends to align with long-term industry trends since charter agreements eventually need to be renewed. Nevertheless, this approach imparts notable stability to the company’s performance.
Q1 Results: Showcasing the Benefits of SFL’s Business Model
A great example showcasing the benefits of SFL’s business model was again visible in the company’s most recent Q1 results. This was, unsurprisingly, another volatile period in shipping, with containership rates plunging, dry bulk rates moving up and down undecidably, and tanker rates hovering at quite elevated levels.
Despite this volatility across different asset classes, SFL’s diversified fleet (which contains 14 oil tankers, 15 dry bulk carriers, 36 container vessels, seven car carriers, and two ultra-deepwater drilling units) was able to produce resilient results due to the company’s long-term leasing strategy. Specifically, revenues landed at $173.3 million, up 12.4% compared to the prior-year period.
Note that while the company’s net income seemingly plunged to just $6.3 million, or $0.05 per share, this was only due to non-recurring items related to mark-to-market accounting and impairments. Vessel and rig operating expenses even declined on a quarter-over-quarter basis.
Is the 10.3%-Yielding Dividend Actually Risky?
As I mentioned earlier, a double-digit yield could, in many cases, signal that the underlying dividend payouts are unsafe. That said, I find SFL’s 10.3% yield to be quite secure for various reasons. To start with, when considering the annualized dividend per share of $0.96 and utilizing last year’s earnings per share of $1.60 as an indicative earnings-per-share potential, we arrive at a very healthy payout ratio of 60%.
This year’s earnings-per-share is likely going to be lower, given the impairments recorded during Q1. However, this is just a paper, non-cash loss. As indicated by the growth in revenues, the company is quite likely to generate more cash this year as its leasing agreements roll into higher rates. Thus, the true payout ratio is likely to improve further.
Besides the payout ratio, which is mostly a metric of the present time, I am confident that SFL’s dividend is secure based on its multi-year charter backlog. Its weighted average term standing at 6.3 years ensures that the visibility of cash flow is exceptional. In fact, considering that SFL has increased its dividend five times between the second quarter of 2021 and now, management feels confident that the elevated payouts can be covered by the multi-year backlog.
It would be imprudent of them to allow the dividend to grow at an unsustainable rate when the company’s medium-term revenues are already predictable. Thus, the safety of the dividend is indirectly hinted at.
Is SFL Stock a Buy, According to Analysts?
Turning to Wall Street, SFL Corporation has a Moderate Buy rating based on a single Buy assigned in the past three months. At $13.00, the SFL Corporation stock’s price target implies 38% upside potential.
The Takeaway
Driven by a well-covered dividend that currently yields 10.3% on a forward basis, shares of SFL are likely to sustain their gradual uptrend. While such a hefty yield may raise concerns about the safety of the underlying dividend, SFL’s unique leasing strategy provides exceptional cash-flow visibility, reducing uncertainty.
Further, the company’s multi-year charter backlog and recent dividend increases also contribute to this argument. Given the lack of highly-sustainable double-digit yields in the market, I believe SFL makes for a compelling pick, especially for income-oriented investors.
