Teekay LNG Partners LP ( TGP - Snapshot Report ) has gained 23.3% since December 2011 thanks in large part to the growing global demand for liquefied natural gas (LNG) as a substitute for coal and oil. Other factors for the advance include a decrease in the construction costs for LNG vessels and a significant increase in distributable cash flow through successful acquisitions. Furthermore, this LNG vessels operator currently enjoys an attractive dividend yield of 6.8%.

After its strong performance in the first quarter of 2012, earnings estimates have been moving higher, making Teekay LNG a Zacks #2 Rank (Buy) on July 12, 2012. The previous quarter marked the company’s 11th consecutive profitable quarter despite functioning in a highly volatile global shipping industry.

A Solid Beginning for 2012

On May 17, Teekay LNG reported first-quarter 2012 earnings of 55 cents per share, beating the Zacks Consensus Estimate by 3.8% and the year-ago earnings by 22.2%. Total Voyage revenue of $99.2 million improved 6.4% year over year. Distributable cash flow of $50.8 million reflects an enormous improvement of 29.9% over the year-ago level of $39.1 million.

First-quarter gross margin was 79%, reflecting an improvement of 1.7% over the prior-year quarter. Operating margin was 47%, up 0.5%. Although net margin declined 1.9%, it stood at a healthy 24.9%.

Estimate Revisions Growing

The Zacks Consensus Estimate for 2012 moved up 5.5% to $2.12 over the last 60 days, while it increased 6.4% to $2.33 for 2013. The current Zacks Consensus Estimate for 2012 indicates year-over-year improvement of 15.2%, while the current estimate for 2013 implies growth of 10.1%.

Lucrative Dividend Yield

Teekay LNG’s current dividend yield of 6.8% is 4.6% higher than its trailing 12-months average dividend yield. In contrast, the average dividend yield of the industry is a meager 1%. The dividend rate has increased by 27.4% annually over the last 5 years, resulting in a payout ratio of a whopping 203.0%.

Valuation Looks Compelling

Valuation of Teekay LNG looks reasonable. The current forward P/E of 18.67x implies a premium of 59.2% from the peer group average of 11.73x. This valuation premium is warranted as the company has maintained profitability when the shipping industry is suffering from an oversupply of vessels. Meanwhile, the stock looks quite attractive given a trailing 12-month ROE of 11%, which is 175% higher than the peer group average of 4%.

Chart Shows Growth Potential

The stock has been trading above its 50 and 200-days moving averages since January 2012. Average volume also remains good at 216.5K. This uptrend should encourage investors as the stock is likely to be on the rise, riding on the increasing global demand for natural gas. LNG tanker operators like Teekay LNG will become major beneficiaries of this positive development.

In a Nutshell

Although the global marine transportation sector is still not out of the woods, the LNG tanker segment is an exception due to the growing adoption of natural gas as fuel for power generation and several manufacturing activities. This, in turn, has resulted in high demand for LNG tankers, which are specifically designed to transport liquefied natural gas. A modernized LNG carrier fleet, fabulous dividend yield and growing market opportunity make Teekay LNG a solid pick for growth and income investors.

Headquartered in Hamilton, Bermuda, Teekay LNG Partners LP was founded in 2004, and is currently the third largest owner and operator of LNG vessels, providing LNG, LPG and crude oil marine transportation services. The company manages 27 LNG carriers, 5 LPG/Multi carriers and 11 conventional tankers.