DryShips Looks Good, Even Without Its Dividends 61 comments
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It is no secret that I view dividend paying stocks as a 'girl's best friend' - at least for the time being. With volatility still at record levels and the continued significant potential for event risk in the credit and equity from mismanagement or fraud, it is wise for investors to move back into long equity positions with some caution.
That said, there is any number of dividend paying companies with temptingly low valuations. For the sake of its dividend, I recently recommended DryShips, Inc. (Nasdaq: DRYS), a transoceanic carrier of drybulk cargo - think steel, coal and grains. Sales topped the $1.0 billion level in the most recently reported twelve months ending September 2008. Profits have soared in the last two years, making an $0.80 annual dividend possible. At the prevailing stock price that provided a yield of 5.25%.
During a period of global economic decline many investors might balk at investing in a company dependent upon trade. However, we point out, it is trade in consumer goods that get hit first and most deeply by macroeconomic declines. According to First Call, the 2009 consensus estimate for DryShips does indicate a drop in sales to $963 million, on which analysts estimate earnings of $5.62 per share. This represents a dramatic decline from the current year wherein EPS is likely to top $10.00 per share. Even at the lower EPS level, the forward P/E is 2.3 times at the current price level. That projected EPS level would also be sufficient to sustain the $0.80 per share dividend…or so I thought.
Within weeks after this commentary was first published, DryShips announced suspension of its dividend, as well as cuts in capital spending plans. Management apparently wants "more flexibility" for its cash reserves. DryShips had $329.1 million in cash on its balance sheet. So my logic was that even if earnings are not as analysts predict, the dividend seemed secure for the time being. Clearly management is looking at a longer "winter" for its business than I measured a month ago.
DRYS shares had soared to $116 per share in May 2008, dropping to an amazing $3.54 by late November 2008. At the current price level, DRYS shares have only just begun to recover and still present an enticing value to investors with a Steady-Eddy investment strategy. A full complement of options provides a means to manage downside risk - or a cheap way to play the long-side for the more wary. This was my original advice and I think I will stick with it. Clearly, however, dividend love should not be allowed to build into blind love. Even the seemingly most well fortified balance sheet and cash flow prospects may not ensure that those dividends will continue.
Disclosure: Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.
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Check the BDI at:
www.dryships.com/pages...
www.investmenttools.co...
I do think that DRYS will strongly outperform during the recovery and is a very good long-term bet as it is definitely an industry leader!
Within weeks? If I'm not very mistaken that was within hours and the article was then mysteriously removed from seekingalpha within another few hours. Sorry Ma'am, but you just lost your credibility for me.
Anyway - anybody interested in investing (not trading) in DRYS might want to first check how their Chairman, CEO, President and CFO (all in one person!) is running his business. Actually I really urge you to do this! His recent actions seem to suggest he first of all cares for himself rather then for shareholders.
On Jan 27 06:45 AM EconoMarcus wrote:
> "Within weeks after this commentary was first published, DryShips
> announced suspension of its dividend"...?
> Within weeks? If I'm not very mistaken that was within hours and
> the article was then mysteriously removed from seekingalpha within
> another few hours. Sorry Ma'am, but you just lost your credibility
> for me.
>
> Anyway - anybody interested in investing (not trading) in DRYS might
> want to first check how their Chairman, CEO, President and CFO (all
> in one person!) is running his business. Actually I really urge you
> to do this! His recent actions seem to suggest he first of all cares
> for himself rather then for shareholders.
Exactly! After making some horrible decisions with respect to purchasing ships that were owned by his own private company Cardiff (including a string of family members), in september/october 2008, when it was already clear that the BDI was skyrocketing DOWN and the the vessel values were pummeling, he canceled those purchases, and is now paying a hefty toll in cancellation fees: cash money + issuance of millions of new shares.
Who benefits? George Economou and his family members in the shipping business. He canceled three such deals and I believe 2 of them were directly related to Cardiff and his family. They've been paid out MILLIONS (yes, you read well! ) in cancellation fees. In one deal, he provides for a cancellation of about 50 million dollars to THREE family members (yes, 50M each)! Where is the money coming from? From the large cash amount on the balance sheet?
I cannot undo myself of the thought that he did all of this with preconceived ideas. In other words: He had it all set up months ago, when he engaged in the deals. He must have known that under the very particular environment at that time, his purchases would not make sense looking at the short term future of little shipping demand and freight prices that would not even strike a break-even deal. Is there something called as the new 21st century crime?
Disclosure: long ESEA
I agree with other posters that the conflicts of interest at DryShips are a bright red flag.
Biomedlives comment about other shippers suspending dividends is apt. Don't overlook the monkey see-monkey do syndrome. I look for more dividend cuts or suspensions, and in fact look upon these actions as responsible managgement.
The support for your comment is that apparently there are quite a few fund managers too lazy to do adequate research who are unduly influenced by the BDI.
I feel that the majority of the negativity stems from a simple human emotion...jealousy...
Go ahead and throw your battered shares at my head, but I have to say that I have found a lot of forethought in his actions.
Ask yourself this...If Cardiff was not linked to Economou by blood would you still view his actions the same? I doubt from a business standpoint that you can justify the sentiment...
Complexities of the industry notwithstanding, there is no denying the correlation between a 90%+ fall in the BDI and the 77%+ fall in the industry average stock price! One would be foolish to ignore it!
While there may or may not be 'quite a few fund managers too lazy to do adequate research' and are therefore unduly influenced by the BDI, this point of view is impossible to quantify, unless you have data I lack!
In the meantime, the BDI has shown a nice increase in January, and lo and behold, a similar increase in the Transportation (ships) industry's EPS followed right along!
Don't throw the baby out with the bathwater!
On Jan 27 10:54 AM oilsands wrote:
> Jim Hawthorne, your comment ignores the complexity of the shipping
> industry and the fact that many ships are on long term lease.
>
> The support for your comment is that apparently there are quite a
> few fund managers too lazy to do adequate research who are unduly
> influenced by the BDI.
1. how many employees does drys 'employ?'
2. how many times has drys bought or offered to buy from cardiff?
3. who is cardiff?
4. how much did the latest failed purchase form cardiff cost drys?
after finding answers(about 5 minutes of work) and if you still want a crack at this 'company' then then have at it.
It needs to be put into Chapter 11 and all the transfers and payments to its Chairman his family and friends and to Cardiff Maritime brought back into the company for distribution to its creditors and shareholders.
While it remains the favorite of the day traders it will continue to be milked by its Chairman however.
I am glad to see som many folks ringing in with comments on this important subject.
Jim Hawthorne, basically I agree with your point and "don't throw out the baby with the bathwater" is one of my favorite sayings.
My comment was meant to modify your point, not contradict it. However, it is well to note the whole market is down, down, down like Davy Jones, so the influence of the BDI is subject to speculation. Also, remember that technical traders exagerate trends up or down. I wish I did have statistics on the fund managers, but that is not in my purview.
i think you've stung Ms. Fiakas and me to our toes. i catch myself defending everything before i know it.
it could be a feminine trait, as you seem to imply, but pointing it out ought to help a lot of us gals work on that fault. if we can force ourselves to admit to it. hee, hee.
as far as investing goes, we surely need to admit and learn from our mistakes, to become better investors. that is the point of this blog, is it not?
Blonde Molly