Are Shippers’ High Dividend Yields Sustainable? 13 comments
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In 1920, people in Europe debated which country would be the next great world power. The top choices were the United States and Argentina; in 1957, an article in Foreign Affairs predicted the Soviet Union would become the dominant economic force; In the 1970s, it was Germany; in the 1980s, everyone agreed that Japan would run the world. Today looks like China /India will dominate this century. Of 1 billion people in India, less than 5 million work in manufacturing. If China is the world’s factory, India is the world’s back office. In spite of the slowdown in the world economy, China has shown an insatiable appetite for raw materials, and it has been the main motor of the boom in commodities and cargo shipping.
In his new book, The New Paradigm For Financial Markets, George Soros wrote that a 60-year period of credit expansion based on the US exploiting its position at the centre of the global financial system and its control over the international reserve currency has come to an end. As the result, a significant part of the monetary reserves currently held in US government bonds would be converted into real assets. This would reinforce and extend the current commodity boom.
The above 2 reasons, combined with high yield, make shippers one of the hottest investment classes. However, it should not be treated as a safe fixed income alternative for following 4 reasons:
1. Higher Payout Ratio
Most of those high yield shippers’ payout ratios are greater than 100%. In other words, they pay out more in dividends than they earn. Those companies’ financing strategy, such as Nordic American Tanker Shipping (NAT), is to pay out earnings as dividends and then go to the equity markets for more capital. Followings are shippers with market cap of more than $1 billion:
Companies | Market Cap | P/E | Div. Yield % |
Tidewater Inc. (TDW) | 2.3B | 6.0 | 2.2 |
Frontline Ltd. (FRO) | 1.8B | 2.6 | 4.1 |
Kirby Corporation (KEX) | 1.8B | 12.0 | 0 |
Seacor Holdings Inc. (CKH) | 1.4B | 7.0 | NA |
Nordic American Tanker Shipping (NAT) | 1.4B | 10.0 | 9.6 |
Diana Shipping Inc. (DSX) | 1.2B | 5.5 | 20.5 |
Teekay Corporation (TK) | 1.2B | 6.3 | 7.6 |
DryShips, Inc. (DRYS) | 1.1B | NA | 7.5 |
Alexander & Baldwin, Inc. (AXB) | 1.0B | 11.0 | 5.1 |
According to Reuters DryShips (DRYS), which had earlier raised $500 million in a similar offering announced in January, on May 8 said it would offer common stock, its third such offering since November, and hopes to raise up to $475 million.
Diana Shipping Inc. (DSX), another double digit yield shipper, on May 7 was offering 6 million shares of its common stock to the public at $16.85 per share..
2. Volatility
On May 20 2008 the Baltic Dry Index reached its record high level of 11,793. Then on Dec 5 2008, the index had dropped by 94%, to 663 points. Though this Friday it had recovered some lost ground, back to 2194, base on Bloomberg.
3. Lack of Credit
Credit crunch means the reduction of letters of credit, historically required to load cargoes for departure at ports. Heavy debt load is also a problem for shipping companies.
4. Underperform
As you can see from the chart, over the last 12 months both iShares FTSE/Xinhua China 25 Index (FXI) and iShares MSCI Emerging Markets Index (EEM) had better results than the top 2 shippers: Tidewater Inc. (TDW) and Frontline Ltd. (FRO), and the only shipper ETF: Claymore/Delta Global Shipping (SEA).
click to enlarge
One of the hottest debates these past few weeks is how much further the bull can run. The average bear market rally has risen more than 43 percent, and there are lots of investors sitting with large amounts of cash, so there might be still room to go higher. However, many believe a pullback is inevitable. When it happens, shippers would be hit hard again due to its volatility. With many shippers bounced back more than 100% over the last few weeks, I gradually reduce my positions in shippers.
Source: data is from Yahoo Finance as of May 08, 2009.
Disclosure: I have long positions in EEM and ESEA.
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This article has 13 comments:
PRGN reduced it's dividend to a reasonable size recently, to $.05/quarter, about 5% yeild of current stock price, and about 13% of earnings. It's PE is still under 2.0 right now and it is way underpriced compared to others like DRYS.
I currently own PRGN & NM, and I sold DRYS and sold EXM some time ago.
Another issue is debt. DSX has virtually no debt, which is the reason it has a higher PE. With no debt it can still make money at shipping rates roughly 1/2 those needed by DRYS or EXM due to their debt loads and P & I payment costs that affect profits and cash flow.
DSX is raising cash from stock sales in preparation to buy cheap, distressed ship assets at any fire sales while the recession continues, not to pay dividends as you insinuated, as they canceled their dividend to save cash according to their SEC filings, once again to buy cheap fire sale auctioned ships as their competitors with too much debt sink into oblivion.
It may be some time before demand for transport overtakes the oversupply of ships. When that happens, then there will be a huge boom in this sector. Until then, it's a potential value trap.
TRMA has also an offshore supply business which is related to the oil price.The higher the price the more the revenue/earnings of that subsidiary.
TRMA has 85 million market cap and more than 60 million $ cash.
Yr ideas are welcomed.
Hao has fallen prey to this.
At the moment I do it by sifting through recent company announcements for each stock I am looking at, or through the forums.
Is there somewhere which displays current div data?
Yahoo is definitely not current on the changes- especially in this "cutting" environment.
I have not found any place where you can get current accurate date for which ever company you are interested in.
On May 11 10:19 AM Boubou wrote:
> Most finacial sites are not organised to follow changes in company
> dividends in a timely way, and present misleading data.
> Hao has fallen prey to this.
> At the moment I do it by sifting through recent company announcements
> for each stock I am looking at, or through the forums.
> Is there somewhere which displays current div data?
On May 10 02:22 PM Ecomike wrote:
> You missed some key research. Many of those shippers you listed,
> like DSX and DRYS canceled their dividends late last year. Others
> like NMM, NM, and PRGN are not even listed in your list above. EXM
> is also missing?
>
> PRGN reduced it's dividend to a reasonable size recently, to $.05/quarter,
> about 5% yeild of current stock price, and about 13% of earnings.
> It's PE is still under 2.0 right now and it is way underpriced compared
> to others like DRYS.
>
> I currently own PRGN & NM, and I sold DRYS and sold EXM some
> time ago.
>
> Another issue is debt. DSX has virtually no debt, which is the reason
> it has a higher PE. With no debt it can still make money at shipping
> rates roughly 1/2 those needed by DRYS or EXM due to their debt loads
> and P & I payment costs that affect profits and cash flow.<br/>
>
> DSX is raising cash from stock sales in preparation to buy cheap,
> distressed ship assets at any fire sales while the recession continues,
> not to pay dividends as you insinuated, as they canceled their dividend
> to save cash according to their SEC filings, once again to buy cheap
> fire sale auctioned ships as their competitors with too much debt
> sink into oblivion.
biz.yahoo.com/p/775mkt...
Many new ship deliveries have been extended, and orders have slowed greatly, while shipbreaking is currently at a high point. There is over-capacity in shipping, especially in dry hauling, that is affecting spot rates. Any effect on spot rates puts pressure on charters, though companies with more charters could be more stable through this low point. As other noted, investigating individual companies is a good idea.
www.hellenicshippingne.../
Hellenic Shipping News is a good source for many reports of the industry. Following changes in the Baltic Dry Index is another useful tool, though it mostly concerns dry cargoes. I still think wet haulers will lead dry haulers, since they are more tied to the prices of oil and natural gas.
Everytime they do this the stock falls back to $22-$24 per share from the mid 30's like it was yesterday.
If history is any guide it'll be down 2-3 points today (wed) and it'll do the slow slide to "$22" per share again in a month or two.
Yes, it's nice to have no debt but the share price gets diluted twice a year it seems.
I won't be a buyer until the stock falls back down into the low 20's "again."
On May 11 10:19 AM Boubou wrote:
> Most finacial sites are not organised to follow changes in company
> dividends in a timely way, and present misleading data.
> Hao has fallen prey to this.
> At the moment I do it by sifting through recent company announcements
> for each stock I am looking at, or through the forums.
> Is there somewhere which displays current div data?