Marine Shipping Stock Looks Like a Solid Option For Income Investors

Algoma Central Corporation (TSX:ALC) recently hiked its quarterly dividend 31%, giving its stock a current yield of about 4%

Capital Ideas Media | May 28, 2021 | SmallCapPower: When Canadian investors think about transporting bulk commodities, stocks such as CNR and CP Rail probably come to mind, but shareholders can also participate in the business of shipping commodities by water in this country.

(Originally published on Capital Ideas Media on April 13, 2021)

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Algoma Central Corporation (TSX:ALC) operates a fleet of vessels, carriers and tankers that travel through the Great Lakes and St. Lawrence Waterway. Its four core business segments are: Domestic Dry-Bulk, Product Tanker, Ocean Self-Unloader and Global Short Sea Shipping.

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Domestic Dry Bulk, which transports commodities such as iron ore, steel, grain, salt, as well as construction materials including cement, generates about 36% of the Company’s EBITDA each year, while approximately 21% of its EBITDA is derived from shipping liquid petroleum products via its Product Tanker segment. And, its Ocean Self-Unloaders segment, which transports dry-bulk commodities throughout North and South America, contributes to about 31 per cent of the Company’s yearly EBITDA.

Algoma’s customers include well-known companies such as Cargill, Lafarge, United States Steel, ArchelorMittal, Imperial Oil, and RioTinto, with high retention rates.

The Company, meanwhile, has a secure ‘moat’ around its operations, as the marine shipping industry has high barriers to entry due to scale, established customer relationships, government regulations, and the specialized vessels involved.

Algoma Central’s business is about as ‘Steady Eddy’ as it goes, with more than 70 years of uninterrupted profitability.

During its most recently reported quarter (Q4 2020), ALC generated better-than-expected revenue and EBITDA of $154.3 million and $59.9 million, respectively, while its earnings per share for 2020 nearly doubled year over year to $1.21.

In early 2021, the Company also hiked its quarterly dividend 31% to $0.17 per share, giving its stock a current yield of about 4%.

Algoma Central shares should be viewed mainly as an income play although there is capital appreciation potential from an expected improvement in the North American economy as COVID-19 restrictions ease.

Algoma management has been cautious in its outlook for 2021 but, regardless, its stock price has momentum on its side, gaining about 26% year to date.

Yet, ALC is trading at an enterprise value-to-EBITDA multiple of 5.2 times the 2021 consensus estimate, below its three-year historical average EV/EBITDA multiple of 5.7 times, according to Bloomberg.

Algoma Central shareholders have realized an average annual return of 12%, excluding dividends, over the past 10 years. And, if history repeats, investors could see 15% plus total upside this year from current levels.

A word of caution, though, ALC stock is thinly traded so potential investors need to buy small in hopes of big gains.

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