Is Frontline's 20% Dividend Too Good To Be True? - Frontline (NYSE:FRO)
The Cyprus-based tanker firm Frontline FRO, on May 31, posted stellar earnings of $0.90 per share and declared a $0.70 dividend. Given the company's stock price of $13.70, this makes for a mouth-watering annualized yield of over 20%.
But the question arises, can this be sustained?
Frontline: A Quick Primer on the Tanker Market
Operating within the crude oil tanker industry, Frontline's fleet comprises 66 vessels utilized for transporting crude oil and refined oil products. The company's revenue stems from a daily rate charged to customers needing to transport oil from one port to another.
The operation of tankers incurs mostly fixed costs. Profits surge when the daily charter rate outweighs the fixed operating expenses, yielding substantial free cash flow. This high degree of operating leverage works wonders within favorable market conditions, flooding firms with cash. Conversely, faced with dwindling oil demand or an oversupply of tankers, many firms cannot bear the fixed costs of operating their fleet, often going bankrupt or being taken over.