With interest rates careening lower, high yields become even more enticing.
So it’s understandable that investors would be excited about an 11.3% yield. But should SFL Corp. (NYSE: SFL) shareholders expect to continue to receive that juicy yield in the future?
SFL owns and operates 80 tankers, bulkers and other shipping vessels. Currently, its ships are in the waters off six continents.
The company’s cash flow finally turned in the right direction last year. After several years of free cash flow below $100 million, SFL burned through nearly $1 billion in 2018 thanks to the purchase of vessels.
In 2019, however, it righted the ship (groan) and generated $210 million in free cash flow. This year, SFL is projected to generate $212 million. The company has long-term contracts in place, so a good chunk of that cash flow should be predictable.
The good news for investors is that SFL paid out $151 million in dividends last year and will likely pay $153 million this year for a comfortable 72% payout ratio. That means it generates plenty of cash flow to afford the dividend.
SFL has paid a dividend since 2004. It cut the payout in 2008 and 2017, the latter of which is not shocking considering that free cash flow kept sinking until it hit negative territory in 2018.
It appears right now that the company won’t need to cut its payout in the immediate future, as free cash flow should cover the dividend. However, we also know that should free cash flow slip, the dividend is likely to be reduced again. That makes us cautious.
I don’t suspect a dividend cut is imminent, but keep a close eye on free cash flow. The company reports first quarter earnings in mid-May. That will be the first indication of whether it is on target to hit its free cash flow goals.
If free cash flow is below expectations and the 2020 projection is lowered, the stock could receive a downgrade.
Dividend Safety Rating: C
If you have a stock whose dividend you’d like me to analyze, leave the ticker symbol in the comments section.
About Marc Lichtenfeld
Marc Lichtenfeld is the Chief Income Strategist of Investment U’s publisher, The Oxford Club. He has more than three decades of experience in the market and a dedicated following of more than 500,000 investors.
After getting his start on the trading desk at Carlin Equities, he moved over to Avalon Research Group as a senior analyst. Over the years, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report, among other outlets. Prior to joining The Oxford Club, he was a senior columnist at Jim Cramer’s TheStreet. Today, he is a sought-after media guest who has appeared on CNBC, Fox Business and Yahoo Finance.
Marc shares his financial advice via The Oxford Club’s free daily e-letter called Wealthy Retirement and a monthly, income-focused newsletter called The Oxford Income Letter. He also runs four subscription-based trading services: Technical Pattern Profits, Penny Options Trader, Oxford Bond Advantage and Predictive Profits.
His first book, Get Rich with Dividends: A Proven System for Earning Double-Digit Returns, achieved bestseller status shortly after its release in 2012, and the second edition was named the 2018 Book of the Year by the Institute for Financial Literacy. It has been published in four languages. In early 2018, Marc released his second book, You Don’t Have to Drive an Uber in Retirement: How to Maintain Your Lifestyle without Getting a Job or Cutting Corners, which hit No. 1 on Amazon’s bestseller list. It was named the 2019 Book of the Year by the Institute for Financial Literacy.
