Today, I recommend selling your shares in Frontline Ltd. (FRO) at market. I am making this call for the following reasons.
First of all, the Frontline's recent filings state, "the Board has adopted a strategy whereby the Company will seek to have a normalized quarterly dividend target of $0.625 per share or $2.50 total per share per year." Bear in mind the current yearly dividend payout is $6 per share. "In addition to the normalized quarterly dividend, each quarter the Board will evaluate how to utilize any potential earnings achieved in excess of the dividend break even level. Such earnings may be used for capital investments, for repurchase of shares or paid out as additional dividend."
My take on this is that FRO -- which has a very highly leveraged balance sheet that is sensitive to the recent rise in short-term interest rates -- may elect to cut their payout for the September dividend that they have yet to declare.
If they do cut the dividend, this most recent run up from $30 to $42 will vanish along with our 20% gain year-to-date. The recent rally is attributable to the rebound in spot pricing for shipping crude, and we had the fortune of being in on that incredible rebound. I have tried to get a response from FRO management, but they are always "in meetings" or on holiday.
But there is another reason I'm recommending getting out. Yesterday, Iranian President Mahmoud Ahmadinejad said Iran would not yield to Western pressure to give up its home-grown nuclear technology. His comments came days before an Aug. 22 deadline Iran set for itself to respond to a demand by six world powers that Tehran give up uranium enrichment in return for economic and other incentives. Iran has so far shown no signs it will accept.
"Today, we are fully mastering the nuclear fuel cycle for our peaceful atomic activities. It is a native technology ... No one can take it away from us," Ahmadinejad said in a televised speech to a rally yesterday in the northwestern city of Ardebil, Iran.
Aug. 22 is next Tuesday, and the rumblings I'm hearing from those in the know suggest that if the U.N. Security Council imposes sanctions on Iran for not complying with the resolution to halt uranium enrichment, then Iran might take steps to interfere with crude oil shipments in the Persian Gulf. What that means is unclear. But any disruption in the free transport of crude from the Middle East will be a major negative for the oil tanker stocks, and Frontline is the biggest in the business.
I don't trust Ahmadinejad for a New York minute and neither should you. He would curtail his country's own exports to drive oil prices to $100 per barrel or higher if it meant crippling our economy. The black market for oil in the Middle East is wide open and Iran will find a way to get its oil out onto the market one way or another, but my immediate concern is for the crude oil tanker sub-sector of the broader tanker sector.
This recommendation has no bearing on our holding in Eagle Bulk Shipping (EGLE), as they are a dry bulk shipper of iron ore, coal and farm commodities primarily to China. So I recommend holding on to this stock as business is very robust as evidenced by EGLE's most recent Q2 earnings report. They don't operate any vessels in the Middle East.
If you've owned Frontline since I first recommended it last January, then you can pocket a nice 20% gain along with the juicy dividends we got paid. Even if you bought the stock in the last few months, whether you are getting out with a big profit or small loss, my recommendation is to sell now.
Keep in mind that it is not my intention for the 25% Cash Machine to be a trading service. On the contrary, it is my objective to hold every position at least a year and a day to benefit from long-term capital gains taxable implications.
But in the publishing business there is also a thing called the "Prudent Man Rule," which is pretty self explanatory. It basically means doing the right thing for your subscribers when there are inherent risks at hand. And right now I believe the prudent thing to do, based on what may be on the horizon, is to get out.
I continue to view the tanker shipping sector as a good place to find double-digit income investments and I'm looking at a couple of new names now, but not oil tankers that work in the Gulf region.
I will update you further as to where to rotate those assets later, but for now I recommend selling your shares of Frontline at market before they declare the next dividend and before Tuesday's U.N. deadline for Iran response. And today is a good day for such action.
Bryan Perry
Editor The 25% Cash Machine