Results have not been pretty for the dry-bulk sector of the shipping industry. Many of the companies I follow (but thankfully do not own) are down 50% or more year-to-date. Some highlights within the dry-bulk sector over the past year include the following:
- Overseas Shipholdings (OSG) files for bankruptcy in November of 2012
- Safe Bulkers (SB) cut its dividend by 67% from $0.15 to $0.05 per share in November of 2012.
- Star Bulk Carriers (SBLK) suspended its dividend on November 30th. The company also revealed that it is not in compliance with some loan covenants.
- Dryships (DRYS) had 4 consecutive quarters of negative earnings per share.
- Excel Maritime (EXM) has dropped 66% year-to-date. Over this time, it has established an equity raising program which is further diluting existing shareholders.
- Eagle Bulk Shipping (EGLE) executed a 1-for-4 reverse split and had to restructure its loan agreements in June of 2012.
The supply-demand picture in the dry-bulk sector is tight and inelastic. Obtaining a new ship is not an overnight process; it often takes two years or more to build a ship. Once the ship is delivered, the cost of the ship is too expensive to not utilize. Thus, if demand for ships drops marginally, the vessel charter rate (the cost to make use of the ship) can decrease significantly. Conversely, increases in demand can lead to significant price hikes. In short, the dry-bulk sector is feast or famine, and right now most companies in the sector are going hungry. The Baltic Dry Index (BDI), a measure of vessel charter rates, bounced off its September 2012 low but remains -33% year-to-date.
Given the current low charter-rate environment, one must be judicious when selecting which shippers to invest in. Numerous dry bulk shipping companies have substantial debt on their balance sheets, and some of these shippers may not be able to adequately service their debt if the low-rate environment persists. These are the types of companies I wish to avoid. To do this, I utilize a debt-to-earnings metric defined as the net debt (total debt less cash) divided by the adjusted annualized EBITDA. An adjusted EBITDA is used because there can often be one-time items (e.g. the sale of ship) that can distort the EBITDA number from quarter to quarter. Shipping companies typically report an adjusted EBITDA value in addition to the regular EBITDA in their quarterly reports. The lower the value of the debt-to-earnings metric the better - either a particular company has a low debt load or generates enough earnings to cover its debt. A value less than unity is especially good.
The debt-to-earnings metric for the following shipping companies were computed using the latest earnings information: Diana Shipping (DSX), Navios Maritime (NM), Paragon Shipping (PRGN), Eagle Bulk Shipping , Excel Maritime Carriers , Genco Shipping (GNK), Dryships , Safe Bulkers , and Star Bulk Carriers . The results are displayed in the table below.
|Symbol||Company Name||Adjusted EBITDA||Total Debt||Total Cash||Net Debt||D:E|
|SBLK||Star Bulk Carriers||45||234||39||195||4.3|
|EXM||Excel Maritime Carriers||80||1,032||27||1,004||12.6|
|EGLE||Eagle Bulk Shipping||50||1,137||18||1,119||22.4|
Two companies stand out from this analysis - Navios Maritime and Diana Shipping. Not surprisingly, NM and DSX have the best year-to-date returns in the dry-bulk sector. In terms of stock price, both companies are down about 2% over the last year. However, NM has paid out $0.24 in dividends, so the total return for NM is positive. DSX does not pay a regular quarterly dividend. Thus, NM is the only name in the dry-bulk sector to post positive total returns year-to-date. Additional arguments for owning NM can be found here. NM maintained its $0.06 per share quarterly dividend in November of 2012, and is currently yielding 7%.
I believe that shipping rates will gradually rebound from their current levels over the next few years as the glut of new ships are absorbed into the market and future new shipbuilds decrease as shipping companies manage costs and/or go belly-up. Based on the analysis above, both NM and DSX are well-positioned to weather the current low-rate environment.