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The global pandemic has resulted in significantly lower stock prices on shipping companies that provide transportation for petroleum and crude oil. The lower prices have created opportunities for high yields on some preferreds. Tsakos Energy Navigation Ltd. (TNP) is one such company and its preferred series F (NYSE:TNP.PF) with a yield of over 12% and a 15% tax rate is a good example of such an opportunity. This article will take the reader through my evaluation of this stock and illustrated my approach to screening companies and their preferreds.
By way of introduction, my articles will focus exclusively on preferred stocks. After over two decades of investing I found the relative safety, lack of volatility, frequent tax benefits and consistent dividend payments of preferred stocks to be very appealing not to mention the fact that the dividends cannot be reduced or eliminated like those of common stocks. They can be suspended but with cumulative preferreds, in the event that they are suspended, there is still a possibility that they will be paid out at the future date.
My approach is a very practical one free from technical analysis of charts. It does not require delving into quarterly reports which I find of dubious value for an unsophisticated investor like me, especially given the potential for clever manipulation and spin to obscure any conclusions that may assist in my investment decisions.
Because of the current global situation a number of preferred stocks that offered annual yields in the 8% to 9% range can now be purchased at prices that provide yields as high as 12% and more. By way of introducing my approach to selecting a preferred I will show how I arrived at choosing TNP.PF, a preferred offering from Tsakos Energy Navigation Ltd. (NYSE:TNP). I consider it to be the best of the preferred issues from TNP and a stock worthy of consideration for the investor looking for a high yield investment who are willing to accept some risk.
This analysis will illustrate the steps I take when screening a preferred stock to see if it meets my criteria and, as the reader will see, while requiring due diligence and some basic math is accessible to anyone willing to spend the time and do the math. The first step I take when investigating a preferred for the first time is to look at the prospectus using the web site QuantumOnline. Entering the symbol TNP in their search form yields the following:
(Source: Quantum Online)
As can be seen from the prospectus, Tsakos Energy Navigation Ltd. provides seaborne transportation services for the petroleum and crude oil with a market value of $194 million. Selecting the “Find All Related Securities for TNP” results in the following list of preferreds:
(Source: Quantum Online)
We are provided with four series to investigate as the TNP.PB series is no longer available. My next step is to create a table with columns for the symbol, yearly dividend, cost, dividend/cost, yield and call date, my top choice and a row for each series. I have a dedicated spreadsheet for this purpose that automatically calculates the yield to avoid user error.
|Symbol||Yearly Dividend||Cost||Dividend/Cost||Yield %||Callable||Best|
(Data: Quantum Online and Yahoo Finance)
The first thing I look for with a preferred stock is that it is cumulative. Simply put, in the event that the dividend payments are suspended they will continue to accumulate and the shareholder will be repaid in full when the payments are restored. Note that Series C has a Failure To Redeem clause. As indicated in the summary at the start of this article, I will dig deeper into why I avoid stocks with the Failure To Redeem clause but for now will point out that the fact that the C shares are approximately $5/share more than the three others which have no such clause. The higher price has a significant negative impact on the annual yield.
(Source: Quantum Online)
At the market price as of the time I’m writing this article the TNP.PF series provides a hefty 12% return so based on having the highest yield, a 15% tax rate, the same as the others, and the lack of a Failure To Redeem clause it is my choice as the one to buy. With this information in hand I next look into the track record of the company to gain insights into the health and long term prospects of the company. As the reader may have gathered by now, I have neither the patience nor the credentials to delve into complex financial reports or embark on complex technical analysis. Despite that I have found that looking at the history of the common stock and the company’s financial highlights is an excellent indicator for future expectations. As the saying goes, “past is prologue.”
For the history of the common stock I normally look at the five year history on Yahoo Finance. I find the commons to be an excellent indicator of the perceived value of the company thanks to the greater liquidity and far higher share trading volume of the commons. In my experience a decline in the price of the preferreds is invariably preceded by a decline in the price of the commons. Changes in dividend payments is another valuable indicator that the commons provide. A reduction or suspension of dividends paid on the commons can bode ill for the preferreds.
(Source: Yahoo Finance)
This chart shows a steady decline in the common over the past five years. Is this an indication of problems specific to TNP or is it down as a result of declining prices in the entire sector thanks to external conditions? For a quick visual on which may be the case I look up other companies with a similar business model for comparison. For comparison I have chosen Teekay Corporation (TK), Frontline Ltd (FRO), Nordic American Tankers Limited (NAT), SFL Corporation Ltd. (SFL) and DHT Holdings, Inc. (DHT), all companies in the crude tanker business. As can be seen from the following graph the downward trend is shared by all of them although to varying degrees. Differences in market capitalization and variations in specific services can account for some of this but it is obvious that the petroleum and oil shipping sector is down. Even so, TNP has been particularly hard hit.
(Source: Yahoo Finance)
For the financial highlights I turn to Finviz.
TNP has a market cap of $164.47 million and lost 18 million on sales of $629.3 million. Its B/S value is $76.54, and D/E appears to be a comfortable 0. YTD, it has lost 59.23% in value. Note that I say that the D/E “appears to be a comfortable 0”. As the reader will see, I have reason to suspect the D/E is actually quite high and not 0 as indicated on the above table. Given the downward trend of the common stock over the past five years and the negative performance, I decided to check the transcript of the Q1 2020 earnings call. I found the following of particular interest:
Vessel sales led to prepayments of $37.5 million related debt, and we also paid $50 million scheduled repayments in quarter one, reducing outstanding debt to $1.49 billion. For our two Suezmaxes being built, we will pay about $90 million for delivery by year end, mostly from arranged loans and for the LNG carrier $36 million by year end and $135 million next year.
As a cumulative preferred investor the most important consideration for me is whether a company will be around long term with minimal chances of going bankrupt or suspending the preferred dividends due to financial problems. My entire investment strategy revolves around reliable, consistent and long term dividend payments free from worry about day to day market fluctuations in the stock price.
On the positive side with TNP we’ve got the high yield and the fact that they met the FTR obligation on series A and B. Another good sign is that they continue to pay dividends on the commons. The high yield makes TNP.PF an enticing investment with respect to ROI but the downward trend of the commons, the 2020 losses, the $1.49 billion debt and planned expenses on new ships lead me to have serious doubts about the long term survival of the company. I welcome reader input on this to see if anyone has additional insights that either confirm or mitigate my concerns about the questionable long term viability of this company.
This is not a stock for the faint of heart but for investors willing to take some risk for a 12% return at a 15% tax rate it could prove quite rewarding, especially in the event that the petroleum and oil shipping sector recovers.
Disclosure: I am/we are long TNP.PF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.