I want to share my next portfolio pick with you today. And on Friday I'll provide you with the last two portfolio stock recommendations in the 25% Cash Machine July newsletter.
When it comes to the shipping business, we've enjoyed some incredible prosperity. Since adding Diana Shipping (DSX) and Eagle Bulk Shipping (EGLE) to our portfolio, EGLE has total returns of 63%-plus in 18 months and DSX's has total returns of 44%-plus in six months. And now, in addition to Diana, Eagle Bulk, Nordic American (NAT) and Double Hull Tanker (DHT), I've found another shipping company that's kicking out an 11.9% current dividend yield -- and paying out special dividends, to boot.
At this time I recommend upping our weighting during this initial growth phase for the dry and wet cargo carriers by adding Golar LNG (GLNG) to our Buy List. We're moving into shipping the most cutting-edge, commercial-use fuel of the future: liquefied natural gas, also known as LNG.
Golar LNG Limited is an independent owner and operator of liquid natural gas ships with a fleet of 12 LNG vessels. It acquires, operates and charters the ships through its subsidiaries.
The stock is down a couple points from its recent all-time high, trading at around $17. I have great expectations for the LNG industry, so buy the stock here with a buy up to price of $19 and a 12-month target price of $25.
LNG is natural gas that has been liquefied by reducing its temperature to minus 260 degrees Fahrenheit. It remains a liquid at minus 116 degrees Fahrenheit. The value in making this conversion is that LNG's volume occupies 1/600th of the volume of the vapor it was formed from, at standard conditions.
With this extreme concentration of liquefied gas it's possible to store phenomenal quantities in a very small space, thus increasing the economies of scale for the gas transfer business by an exponential rate. In fact, with LNG as a tiny fraction of the volume of natural gas, it is much more cost-efficient to transport over long distances where pipelines don't exist.
More than 65% of the world's freight is transferred by ship on a daily basis, with a little less than half of that being oil, gas and liquefied natural gas. Where moving natural gas through pipelines isn't possible or economical, LNG vessels are simply the next-best choice.
LNG offers an energy density comparable to gas and diesel fuels, with the added benefit of producing less pollution. But what has hurt the industry in the past is the high cost of production and storage. These two factors alone have slowed the acceptance of liquid natural gas for commercial applications.
In May, Golar's board of directors declared a 50-cent dividend on earnings of 81 cents per share. Nice! The dividend was paid on June 19, 2007. What matters most to us is that we'll have a $2-per-year dividend payout.
GLNG's shares are trading at $16.75 and we're locking in an 11.9% dividend yield as the fundamentals of the company are rapidly improving. As usual, it's all about cash flow when supporting the case for the high-dividend yields and GLNG is producing the necessary cash flow per share to accomplish good yields.
I like our chances very much with this pure energy play in concentrated natural gas -- particularly because the top and bottom line momentum are strong. Take a look at some of the highlights:
These are impressive numbers and, while forward numbers will be somewhat erratic for a few more quarters, they leave no doubt that the need for clean fuel in regions that are hard to access, belongs to the LNG transport companies. I expect earnings at Golar LNG to grow at least 20% per year for the next five years -- and that just might be a very conservative forecast!
World demand for liquefied natural gas is expected to double by 2010 -- up to more than 280 million tons consumed. And, in particular, Australia has emerged as a key supplier for nations looking to secure supplies produced in geopolitically stable regions. The Pacific Rim region accounts for about 70% of the world's LNG trade, with demand in Asian markets expected to grow 80% by the year 2015.
Demand for LNG is growing because it is viewed as safe, flexible, reliable, economical and -- one of its biggest pluses in this current "go green or go away" climate -- environmentally acceptable. It's the ideal fuel for home heating, cooking and for generating electricity.
With growing demand, and declining alternative sources of energy, the United States is very likely to be a major growth market for LNG imports, with an eightfold increase forecast by 2015. This will be particularly noticeable in California where 83% of LNG is currently imported, and a considerable shortfall is predicted unless new production and importing facilities are built. Right now, that looks unlikely.
Take a full 3% position in shares of Golar LNG (GLNG) and buy it under $19. Currently you may even be able to get GLNG at around $17 -- and that makes it a great buy. There has been a positive (and impressive) money flow into GLNG on the slight pullback since late May.
One last thing to be aware of is that owning Golar means accepting a higher level of volatility. I won't kid you, GLNG is almost certainly going to exhibit some wild price swings, but the future for LNG is so bright we can deal with the short-term volatility.
As mentioned above our target price is $25, and given the strength of the energy markets I like our chances of hitting that mark.
Current Price: $16.75
52-Week Range: $12-$18.69
Target Price: $25
Dividend Yield: 11.9%
Dividend Payout (Annual): $2
Payout Frequency: Quarterly
Ex-Dividend Date: est. Sept. 14
Div. Payment Date: est. Oct. 3
Market Cap: $1.1 billion
Take care, have a great Fourth of July and I'll see you Friday with the Weekly Update and the July newsletter containing the last two securities to fill out our portfolio.
Bryan Perry
Editor The 25% Cash Machine