The stock market kept some of its upward momentum on Friday morning, building slightly on gains in Thursday’s big market reversal. Lately, though, investors have had trouble seeing any firm direction in the stock market.
There have been countervailing factors that have created volatile moves in both directions, and that seems to have market participants feeling a little uncertain about how best to position their investments. As of 11:15 a.m. EDT, the Dow Jones Industrial Average (DJINDICES:^DJI) was up 132 points to 32,751. The S&P 500 (SNPINDEX:^GSPC) gained 15 points to 3,924, while the Nasdaq Composite (NASDAQINDEX:^IXIC) picked up just eight points to 12,986.
One news event that’s getting a lot of attention around the world is the current blockage of the Suez Canal in Egypt. A cargo ship got stuck in the canal, and that’s created a logjam of shipping traffic. The canal is the only alternative to sending vessels all the way around the southern tip of Africa in order to get between the Indian and Atlantic Oceans, and connects markets in Europe with those in Asia. Therefore, many worry about the potential impact on global trade.
Yet at least a few transportation stocks are seeing their share prices rise as a result of the problem, as shipping companies foresee the potential for higher rates ahead.
Big jumps for shipping stocks
Shares of several shipping companies showed sizable gains on Friday morning. Nordic American Tankers (NYSE:NAT) was one of the biggest winners, posting a gain of 14%. DHT Holdings (NYSE:DHT) and Frontline (NYSE:FRO) also posted solid share-price increases of 8% and 7%, respectively.
Nordic American commented on the Suez situation in a press release on Thursday, and what it said offers the bullish case for shipping stocks. The company said that it’s unclear how long the Suez Canal will stay closed to traffic and explained to those unfamiliar with basic geography that if the canal were to remain closed for a prolonged period of time, vessels would have to go the long way around. Because that’s a substantially longer distance, it would mean that fewer trips between key ports would be possible in a given period of time.
Because longer voyages will soak up spare shipping capacity, there’ll be less excess available for those needing shipping services. That will allow Nordic American to boost freight rates, potentially leading to higher profits, at least for a short period of time.
Cheap dividends or value traps?
Interestingly, shares of shipping companies haven’t been among those that have gotten big bids higher in hopes of reopening economies around the world. Shipping activity would presumably benefit from an economic rebound, but Nordic American remains below levels at which it traded last summer, even after today’s big rise. Frontline and DHT have seen somewhat larger ticks higher, but they’re still not seeing the huge jumps investors have seen in beaten-down travel and leisure stocks.
For dividend investors, the yields on these tanker shipping stocks at first glance look almost too good to be true. Since March 2020, Frontline has paid $1.60 per share in dividends, making a yield of almost 20%. Nordic American has paid $0.40 per share for a yield of more than 10%, while DHT’s $1.08 per share in dividends over the past 12 months gives it a roughly 16% dividend yield.
The problem is that shipping-stock dividends are highly volatile. DHT’s latest dividend was just $0.05 per share after having been as high as $0.48 per share last summer. Nordic American’s $0.02 per-share payout this month was similarly down 90% from what it paid out in August 2020, and Frontline has not paid any dividend since last September.
Some believe that the Suez Canal could get unblocked as soon as this weekend. If that happens, then the momentary spike in shipping stocks could abruptly reverse itself.
In the longer run, what’s important is whether demand for the energy products that tanker companies ship will remain high. As long as the world emerges from the COVID-19 pandemic in short order, the odds of that demand coming back look good.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.