The pandemic induced profound changes in the short term and will permanently alter things to at least some degree for a long time. Such change can create great investments.
One industry that is benefitting from the altered world is shipping. Seaborne shipping stocks have had their best year in well over a decade. Shipping rates have soared amidst the rapid recovery and pent-up consumer demand as well as supply chain disruptions that have limited the number of ships available.
These changes should be long lasting for one industry subsector, container shipping. The torrid rise of e-commerce and technological efficiency should permanently increase demand for container shipping at a time when supply is limited and will remain so for a while.
In this issue I highlight a container shipping company that is growing earnings at better than a 100% annual clip, sells at a still cheap valuation, and currently yield 6.7% with a dividend that should continue to rise in the years ahead. The stock could have a lot further to rise in the year ahead.
This Month’s Featured Stock
Profit from This Pandemic-Changed Industry
The world has undergone a massive disruption over the last two years. Such events almost always create opportunity.
The global pandemic hit the world like a meteor. The ensuing lockdowns crashed the economy overnight. And the end of those lockdowns revived the economy almost as fast. The experience of being locked down at home for a year changed consumer behavior.
The pandemic induced profound changes in the short term and will permanently alter things to at least some degree for a long time. Such change can create great investments.
For example, stationary bike company Peloton Interactive (PTON) soared 725% in just seven months between the onset of the pandemic and October 2020. Zoom Video Communications (ZM) shot up 735% over a similar time frame. The lockdowns created an immediate and massive need to communicate and work out from home.
Of course, those stocks have come back down as the environment has normalized. The main catalyst driving those stock prices to such extremes was temporary. But some changes are longer lasting, and others are permanent.
The growing trend toward e-commerce and online shopping soared to a level well beyond what it would have reached without the pandemic and will likely stay at a higher level for good. Working from home is another trend that got a massive shot in the arm from the pandemic. People are now working from home and will continue to do so well beyond the levels without the pandemic.
But these things are relatively obvious changes. And the market is already addressing them for the most part. The events of the last two years have also altered things in ways that are much less obvious and well-known. These areas are where great investment opportunities lie. Some businesses will benefit in ways investors have not yet realized.
One industry that is benefitting from the altered world is shipping. Seaborne shipping stocks have had their best year in well over a decade. Shipping rates have soared amidst the rapid recovery and pent-up consumer demand as well as supply chain disruptions that have limited the number of ships available.
Although this recent good fortune may prove to be temporary for the overall industry as consumers slow down and supply issues get worked out, changes should be much longer lasting for one industry subsector, container shipping. The torrid rise of e-commerce and technological efficiency should permanently increase demand for container shipping at a time when supply is limited and will remain so for a while.
In this issue I highlight a container shipping company that is growing earnings at better than a 100% annual clip, sells at a still-cheap valuation, and currently yield 6.7% with a dividend that should continue to rise in the years ahead. Thus, the stock could have a lot further to rise in the coming years.
Monthly Activity
December 15
AbbVie Inc. (ABBV) – Rating change “BUY” to “HOLD”
January 12
AGNC Investment Corp. (AGNC) – Rating change “BUY” to “SELL HALF”
Broadcom (AVGO) – Rating change “BUY” to “HOLD”
Compass Diversified (CODI) – Rating change “BUY” to “SELL”
Buy Global Ship Lease, Inc. (GSL)
What to Do Now
2022 is likely to provide lower returns than the past two years in the market. That torrid pace simply can’t last. In addition, the market is high, and problems are growing. The main issues at this point are inflation and Fed tightening (because of inflation). The virus is also an issue for now but should fade and give way to the other issues in the weeks and months ahead.
While this year may not be a great one for the market indexes, certain sectors should perform very well. Sectors that benefit from inflation and rising interest rates should be a good place to invest, namely energy and financial stocks.
And that is exactly what has been playing out so far this year. As of the close Monday, nine of the 11 S&P 500 sectors were in negative territory for the year. The only two sectors to show a positive return were energy and finance. And those sectors are up big. Financial stocks are up 5% and energy is up a whopping 10% in just the first six trading days of the year.
The beneficiaries of these sectors in the Cabot Dividend Investor portfolio include Enterprise Product Partners (EPD), ONEOK (OKE), Chevron (CVX) and Valero Energy (VLO) as well as financial companies Visa (V) and U.S. Bancorp (USB). These stocks should benefit disproportionately at least in the first part of the year—and possibly longer.
Other stocks could see a much choppier environment in the months ahead. I’m particularly cautious of stocks with bad news that are not behaving well. In this issue, two positions are being sold for those reasons.
I’m not expecting gloom and doom for the year ahead. We are still in the early stages of a recovery and bull market. But we can’t expect returns that we’ve seen over the past two years. Despite the high index valuations, there are still cheap stocks and pockets of opportunity. There can still be big winners this year. They’ll just be fewer and harder to find.
FEATURED STOCK
Container shipping should have another strong year in 2022.
An intermodal container is a standardized and reusable steel box used to transport and store goods. Intermodal means that the containers can be moved from one mode of transport to another, for example from ship to rail or truck. I’m sure you’ve seen these things around all over the place, on the back of trucks or piled up at ports.
Massive amounts of goods traded in the world are transported in these containers because they’re a good idea. You ship goods, unload them and put them right on a truck. It makes delivering goods efficient and easy. Demand for this form of trade is growing fast.
Unlike dry bulk or liquid content, containers deal in manufactured goods of all types including clothes, medicine, processed foods, electronics and even automobiles.
Demand for containers continues to rise and is expected to keep doing so for several good reasons. For one, the rise in e-commerce will likely continue to increase demand as finished goods are demanded at an increasing rate from all over the world. Second, containers lend themselves to future trends like efficiency, safety and automation.
At the same time, delivery of containers by seaborne vessels will remain the preferred delivery method because it is by far the cheapest form of transportation. And that won’t go out of style.
Shipping rates have absolutely skyrocketed during the pandemic. Economies opened up after the shutdowns and the consumers with high savings rates and pent-up demand started buying like crazy. The global transportation network couldn’t keep up with the steep and sudden rise in consumer demand for goods.
The high demand combined with the supply chain problems. Vessels have been stuck at congested ports for weeks at a time and don’t make it back into the rotation. The demand for more deliveries and more vessels exhausted any spare capacity, and rates skyrocketed.
The chart below shows container shipping rates for 700 TEU vessels. A TEU is a shipping container with internal dimensions that measure approximately 20-feet long, 8-feet wide, and 8-feet tall. It is the industry standard container size. Container ships range in size from about 500 TEU to as large as 22,000 TEU, meaning that is how many standardized containers they can carry.
As you can see from the chart, rates have more than quadrupled since the pandemic. There is an important thing to note: Rates for other types of shipping peaked in October and have come down sharply already. But containership rates have barely budged and may go still higher. There’s a reason for that.
Containerships are in higher demand with more limited supply. Sure, the current supply chain problems will ease eventually. The spike in consumer demand will level off. Rates probably won’t stay this high for that long. But container shipping rates are likely to remain at higher levels than before the pandemic, long after the current problems are resolved. And the current issues may linger for the rest of 2022, and possibly beyond.
Buy Global Ship Lease, Inc. (GSL)
Global Ship Leasing (GSL) owns and charters containerships under fixed-rate charters to container shipping companies. The company deals in mid-size and smaller container ships, which are the workhorses of the main global containerized trade routes. Global is based in the Marshal Islands, with offices in London and Athens, and the stock trades on the New York Stock Exchange.
The stock has had a wild ride, along with the rest of the industry, over the last 10 years. But it has been showing strength and resilience more recently. Global has consistently grown earnings and revenues over the last three years. The shipper has also grown revenues and earnings through the pandemic. Revenues have more than tripled since 2018. Earnings per share grew from $1.48 in 2019 to $2.09 in 2020 to $3.01 in just the first three quarters of 2021.
Earnings grew at a great clip before and during the pandemic even before the spike in shipping rates. There is no question that Global has benefited from higher shipping rates because many expiring charters were renewed at higher rates, and new charters fetched a much higher rate than previous ones. But Global is poised for solid performance even if the high rates don’t last, just not as good.
Although full-year 2021 results have not yet been reported, consensus analysts’ expectations are for earnings growth of 165% for 2021 and 134% in 2022. The reasons for the torrid growth are both external and internal.
The biggest reason internally is that Global has been growing its fleet. In fact, Global grew its fleet by more than 50% in the first three quarters of 2021 alone. The containership company purchased 23 ships, increasing the fleet from 43 to 65 ships, and also added two more ships in the fourth quarter. While the cost of the acquisitions was $498 million, charters on those ships, inherited or initiated, already more than offset the cost.
At the same time, Global has refinanced debt at lower rates and decreased cost of overall debt from 7.72% to 4.93%. Global has a debt/equity ratio of 165, which is reasonable for the industry. And it just got a credit rating upgrade. Global has also significantly improved profit margins over the past few years and has an impressive return on equity (ROE) of over 20%.
The external environment is shaping up well too, aside from higher shipping rates. As I mentioned, demand for containers and containerships has skyrocketed of late and will likely stay high. The Global fleet is aging and there is a limited supply currently. Businesses have noticed and are ordering more ships, which could adversely affect the supply/demand dynamic and prices in the future.
But those new orders are still a while away from the market, and the order book is much smaller for the small- and mid-size ships in which Global deals. Global estimates that all current new orders would add 6.3% to the existing Global fleet through 2024. But it also estimates fleet growth to be just 0.7% for small- and mid-sized ships through the same period if ships older than 25 years are scrapped, which is the norm.
The small- to mid-sized containership market is also highly fragmented. There are many small player that can be bought out by a larger company like Global. That makes for an abundance of accretive growth opportunities going forward.
The Dividend
GSL currently yields a strong 6.7% at the current price.
However, the company just initiated a dividend in January 2021, so it doesn’t have a track record. But there are some very encouraging signs. For one, Global just raised the dividend by 50%, to $0.375 per quarter from $0.25. It is also triple the initial dividend. And that dividend is well supported, with just a 20% payout ratio with a lot of room to grow.
Global Ship Lease, Inc. (GSL)
Security type: Common stock
Industry: Shipping
Price: 22.50
52-week range: 11.30- 26.51
Yield: 6.67%
Profile: Global Ship Leasing owns and charters container ships under fixed-rate charters to container shipping companies.
Positives
- The company is dramatically growing the fleet and earnings.
- Demand for container ships is the strongest in the industry.
- Ship supply is likely to remain limited amidst high demand.
- Shipping industry fundamentals are the best in more than a decade.
Risks
- A worsening pandemic could send shipping stocks reeling if trade is impacted.
- The stock is highly cyclical and dependent on the global economy.
- Geopolitical events like a Chinese/Taiwan incident could crash shipping stocks.
Portfolio At A Glance, Portfolio Updates and Dividend Calendar
Portfolio at a Glance
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Portfolio Updates
High Yield Tier
The investments in our High Yield Tier have been chosen for their high current payouts. These investments will often be riskier or have less capital appreciation potential than those in our other two tiers, but they’re appropriate for investors who want to generate maximum income from their portfolios right now.
Rating change “BUY” to “SELL HALF”
AGNC Investment Corp. (AGNC – yield 9.3%) – This mortgage REIT has found a new range between 15 and 16 per share. This is disappointing because the 10-year Treasury rate is on the rise and just hit new post-pandemic high at 1.77%. AGNC benefits from a steepening yield curve as it earns higher spreads. But it hasn’t reacted positively to the recent rise while other yield curve sensitive stocks, including U.S. Bancorp (USB), have.
It could be that the reduction of the Fed’s purchase of agency mortgage securities is offsetting the benefit. The anticipated event of rising rates is occurring, and the stock is not reacting positively. Therefore, the portfolio will sell half of the position now and give the other half a little more time to work. The remaining position will be reduced to a HOLD rating. SELL HALF
Blackrock Enhanced Capital and Income Fund (CII – yield 5.5%) – This covered call ETF is a good place to be looking ahead to a more choppy and sideways market in the new year. It provides a higher level of income at the expense of capital appreciation potential. That should be a good trade. Plus, the more defensive nature and high dividend should be attractive to investors going forward. It’s a high-dividend security that doesn’t really suffer as rates rise and other dividend stocks take a hit. BUY
Rating change “BUY” to “SELL”
Compass Diversified (CODI – yield 4.7%) – This owner of small companies announced a dividend cut last week. It was cut from $0.3325 per quarter to $0.25. It reduces the yield from 4.7% to 3.5%. There is no coherent reason stated by the company for the cut. The payout ratio was reasonable and earnings have been on the rise. Stocks generally don’t perform well after such cuts, and CODI also provides a smaller yield. There had to be a reason that hasn’t been declared yet. I don’t want to stick around and find out. It can’t be good. The stock is a small loss for us and there are better opportunities elsewhere. SELL
Enterprise Product Partners (EPD – yield 7.9%) – This undervalued and underappreciated midstream energy giant has finally come alive and it’s on the move. EPD is up about 10% so far this month. It certainly helps that the energy sector is surging. It seems to take a strong move in the sector to get EPD going. The sector rally should continue for a while and hopefully pull EPD up to new highs. This stock is very undervalued with a very safe distribution and a huge yield. The move is more than justified. (Note: This security generates a K1 form at tax time). BUY
ONEOK Inc. (OKE – yield 6.0%) – This better-performing midstream energy stock has rallied into this year as well, although it has pulled back in recent days. The stock returned 65% in 2021 and has less ground to make up. That said, OKE is still priced below the pre-pandemic high despite higher earnings and a great prognosis going forward. I expect more good things from this natural gas infrastructure giant in the year ahead. The recent pullback is a concern because the sector has been strong. I will monitor it closely over the next week or two. BUY
Realty Income (O – yield 4.1%) – Despite a rough year so far for REITs – the sector is down 5.5% YTD – O is hanging tough not far from the recent high. It made a new high last Tuesday but has pulled back a little. O is still well below the pre-pandemic high for no good reason. I like the way the stock is situated going forward as earnings are growing at a better-than-average clip because of the recent acquisition and investors should gravitate toward safer dividend stocks in a choppier 2022. HOLD
STAG Industrial (STAG – yield 3.2%) – There is finally a kink in the armor. This industrial REIT had been trending higher since the beginning of 2021. But the stock has pulled back about 7% in the past couple of weeks as the real estate sector has struggled. STAG did return a whopping 64% in 2021. So the 7% downmove is significant for this stock. I will keep a close eye to see if it consolidates further after a huge year. HOLD
Dividend Growth Tier
To be chosen for the Dividend Growth tier, investments must have a strong history of dividend increases and indicate both good potential for and high prioritization of continued dividend growth.
AbbVie (ABBV – yield 4.2%) – The biopharmaceutical giant made a new all-time high last week and is holding tough very near that level. It’s especially impressive considering that the healthcare sector is having a lousy year so far. It’s another new high for this biopharmaceutical giant. Recent returns have been sensational. ABBV is up over 26% since late October. Fantastic earnings got the stock moving and its strong pipeline continues to impress. Yet the stock still sells at a very cheap valuation and might have more to go on this run. It has returned more than 100% since being added to the portfolio as the long-term story is playing out. HOLD
Rating change “BUY” to “HOLD”
Broadcom Inc. (AVGO – yield 2.7%) – Ouch. This legendary technology player had been hot since the beginning of October but has really cooled off over the last week. After moving about 40% higher in three months, AVGO has fallen more than 8% in the past week. Technology stocks have been pressured as investors fear rising interest rates will pressure margins. Plus, there is concern about the enduring chip shortage and AVGO was probably due for a consolidation anyway. The company has been masterful in managing the chip shortage so far. And the longer-term story is still very strong. But we will reduce it to a HOLD until it breaks the recent downtrend. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.4%) – This infrastructure partnership made another new high last week, but just barely. It has since pulled back just a little. It is hanging strong in an environment that has been tough for defensive dividend payers, so that’s good. BIP has been on an uptrend since the market bottom in March of 2020, albeit a slow and sometimes choppy one. It still looks solid and earnings should be strong, reflecting the new acquisition. (Note: This security generates a K1 form at tax time). HOLD
Chevron Corp. (CVX – yield 4.3%) – This is Chevron’s time to shine. The energy sector is red hot again. Oil prices have been rising sharply with no end in sight. And energy demand is strong. This stock should deliver blowout earnings when it reports at the end of this month. It has spent this month making a series of new highs and the surge should last longer and possibly get a boost after the earnings report. This is a good stock to be in right now. HOLD
Eli Lilly and Company (LLY – yield 1.5%) – The big pharma company stock is bouncing around after making a new high last month. That’s normal. And the healthcare sector has been weak. But the Lilly story is still marvelous. Its pipeline of drugs is doing great. Lilly raised guidance for this year and next. And there will likely be an approval of the potential mega-blockbuster Alzheimer’s drug later this year. HOLD
KKR & Co. Inc. (KKR – yield 0.8%) – The stock has been trending lower since hitting the high in early November. It hasn’t gotten much traction recently despite the rally in financial stocks this year. The portfolio sold half of the position when it was near the high. Business is still strong and the company should have a good year in 2022. But this stock needs to break the downtrend. I will keep a close eye on it in the weeks ahead. HOLD
Qualcomm Inc. (QCOM – yield 1.5%) – It’s been a tough year so far for technology stocks. The sector is down about 5% so far this month as investors fear inflation and rising interest rates will cut into margins and growth. But QCOM is still hanging pretty tough. Sure, it has leveled off since the 40% surge in a month. But the stock is still banging around in a high range. It hasn’t sold off or consolidated. It just stopped going higher for now. The behavior is encouraging, and I expect another move higher when the hostile external environment abates. HOLD
Spectrum Brands Holdings, Inc. (SPB – yield 1.7%) – Since being added to the portfolio the stock has soared following the announcement of the sale of its home improvement division. It then got another big bump and made a new high after last quarter’s earnings. It has since been bouncing around. It sells home products and that business is on the rise as people will likely remain more home-centric even after the virus is completely gone. HOLD
U.S. Bancorp (USB – yield 3.0%) – USB appears headed right back to the high. The stock has done nothing since the spring, but it has been rallying along with the financial sector over the past couple of weeks. USB has had a nice 10% move higher in the past few weeks along with the 10-year rate. The pressures of inflation and a strong economy combined with the Fed tapering are likely to put upward pressure on rates in the months ahead. The bank will earn higher net interest spreads with a steepening yield curve. That missing piece of the puzzle should drive the stock to new highs and beyond. HOLD
Valero Energy Corp. (VLO – yield 4.8%) – Here we go again. Energy is hot. And this high-leverage energy play is hotter. VLO has soared 24% since the end of November and is rapidly approaching the post-pandemic high of 85 per share. I think this surge has further to go. Prices are high and demand for refined product remains strong. It should get a further boost later in the year as airlines get back on track. This is the Promised Land we’ve suffered for. Enjoy. HOLD
Visa Inc. (V – yield 0.7%) – This transaction behemoth had been red hot, but it sold off last week. A Japanese investment firm downgraded the rating. The rationale was that so many customers converted from using cash to a card during the pandemic that the analyst felt it would cannibalize future growth. That’s nonsense. More cards are now being used. Plus, the international recovery and renewed travel will give the company a big boost in the new year. The stock is already recovering. BUY
Safe Income Tier
The Safe Income tier of our portfolio holds long-term positions in high-quality stocks and other investments that generate steady income with minimal volatility and low risk. These positions are appropriate for all investors, but are meant to be held for the long term, primarily for income—don’t buy these thinking you’ll double your money in a year.
Invesco Preferred ETF (PGX – yield 4.9%) – After falling during the pandemic, this preferred stock ETF has recovered. This preferred stock ETF is much less volatile than the stock market while providing a big yield. It also adds diversification as preferred stock performance is historically not correlated to the stock and bond markets. Preferred stocks are a little-known way to generate a strong yield with much less volatility than a conventional dividend stock. HOLD
NextEra Energy (NEE – yield 1.8%) – This formerly hot regulated and alternative energy utility is having an awful year so far. NEE is down about 10% already in 2022. Part of the reason is that safe dividend stocks have been taking it on the chin as inflation and rising interest rates became the story. At the same time, NEE had a relatively uninterrupted run higher since October and was probably due for a consolidation. But the main story remains intact. So far, recent behavior appears to be a temporary aberration. Maybe the earnings report later this month can turn things around. BUY
Xcel Energy (XEL – yield 2.6%) – This smaller alternative energy utility is a far different story than NEE right now. It’s up over 3% this month and is continuing an uptrend that has been in place since November. XEL appears on track to test recent highs. Xcel’s lesser-known status may be insulating it from the recent rejection of utility stocks in general. We’ll see how the recent action plays out in the next several weeks. But the longer-term attractiveness remains intact. Alternative energy is still growing and investors are likely to favor this safe way to play the trend. BUY
Dividend Calendar
Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Dividend Investor for an explanation of how dates estimated.
The next Cabot Dividend Investor issue will be published on February 9, 2022.