The mass of people watching the fortunes of shipping companies are familiar with the Baltic Dry Index which tracks the current spot rates for shipping dry bulk goods. The fact is that you can parse shipping companies in about 2 time 3 equals 6 general ways.

First, shipping companies can elect to put their ships on long term fixed rate contracts where they know exactly how much they will earn over the multi-year life of the contract. Or they can lease their ships out on the spot market where they earn the spot rate at that time for the next voyage of their vessel. Shippers in the spot charter business can have their daily rates fluctuate wildly with global shipping demand. Time charter companies are more concerned with  their long term charter customers staying financially strong and being able to add new ships at profitable charter rates. This is our first 2 differences.

Then shipping companies can be broken down into 3 different categories. Container shippers generally carry shipping containers of finished goods from the country of manufacture to the country or region where the goods will be sold. Dry bulk carriers do what their name implies, they haul bulk commodities like iron ore, coal and grains from the producing regions to the manufacturing ones. Tanker companies are primarily in the business of transporting oil from the producing countries to the refineries of the consuming countries. The two most common tanker sizes are the VLCC (supertanker) and Suezmax. Each of these 3 different types of shipping serve different markets, take different routes and earn different rates. Companies that own these ships tend to be in one market or another and few cross-over into the different types.

Shipping companies are generally known as good dividend payers and attract investors by their very generous payouts. Time charter shippers attempt to pay a steady dividend and grow their payout over time by increasing their fleet size. Spot market shippers will have volatile dividends based on the average daily charter rates their ships earned during the previous quarter.

The point of all this background is that while the spot rates for bulk cargo and container shipping have fallen tremendously over the past 6 months, to the point where the daily rates are below the cost to run a ship, tanker rates have remained strong, steady and profitable through all of 2008. In October spot rates averaged $76,800 per day for VLCCs and $57,400 for Suezmax tankers. That is money already in the bank for the 1st month of 4th quarter. Daily cost to run a supertanker is in the $20,000 to $25,000 range, so you can see what kind of profit these companies generate. Also, spot tanker rates do not correlate to oil prices and lower oil prices do not necessarily mean lower spot rates.

Here are some stocks of tanker companies that trade on the U.S.. markets:

• Frontline Ltd. (FRO) This is the largest of the tanker companies with over 70 VLCC and Suezmax tankers. FRO also owns 8 dry bulk carriers. FRO has paid $9.25 in dividends over the last 4 quarters giving a trailing yield on the current stock price of 32%.
• Teekay Tankers, Ltd. (TNK): Owns 11 Aframax (another size) and Suezmax tankers split between time and spot charters. They have been growing their dividend strongly this year and have paid $1.60 over the last 2 quarters pushing the yield to over 30%.
• Nordic American Tankers (NAT) Has a fleet of 12 Suezmax tankers on leased on the spot market. NAT has paid dividends of $4.89 over the last 4 quarters and has paid a dividend for 45 straight quarters. Current yield is north of 20%.
• Knightsbridge Tankers Ltd (VLCCF) has a fleet of 4 VLCC tankers. VLCCF has paid $2.75 over the last 4 quarters and the historical quarterly dividend has fluctuated between 45¢ and $2.00.

The important point to remember with these companies is that the dividend will change with the earnings which will change with the spot tanker rates. Right now, Suezmax rates are a little stronger on a relative basis than VLCC, but do your home work. The market will has trouble valuing these stocks because it is nearly impossible for forecast rates more than a few months into the future. I think of these stock as opportunities when prices are cheap to make like a bandit when dividends are high.