What Happened to Omega Navigation?

| About: Omega Navigation (ONAVQ)

By Skymist

Omega Navigation (ONAV) is a small cap Greek owned shipping company which transports crude oil and refined crude oil products. It used to be priced in the mid 20's per share, but today it is a mere $3.61. Did its ships sink? Captured by pirates? No, but the story is still interesting.

You can see from the chart that the young company, after issuing its 12 million shares and starting operations, committed to a an optimistic policy of paying 50 cents per share dividend regardless of its earnings. Only once, in the fall of 2008, did its earnings exceed 50 cents. If a company is paying out more than it makes, it has to be getting it from somewhere other than earnings, and there are only two places it can come from - the book value (selling assets or spending cash), or by taking on debt. In the long run, either of these reduces the value of the company, and the share price follows.

Wall Street always makes the mistake of valuing a transporter based on the value of its cargo. This also contributed to the decline in ONAV. As the value of crude oil dropped, the value of crude oil shipper stock dropped - even more, in fact. The mistake lies in the fact that demand did not drop as much, and it is demand, not price, that determines how much money a shipping company makes.

Finally, in mid-May this year (not March as shown in the first chart) ONAV was forced to admit its folly, and it suspended its dividend. Paradoxically, the stock price rallied for a while, as stockholders appreciated the company's return to a payout policy based on reality.

With the dividend suspended, how long would it take for the debt accumulated due to excessive payouts since 2007 to be amortized? Adding up the difference between the payout and the income, we see we need 81 cents. The company got 41 cents of that in the last quarter, so about one more quarter of missed dividends would catch it up. Many companies canceled their dividends but instituted share buyback policies instead -- not as useful a benefit to a shareholder, and it does soak up a lot of company revenue. ONAV fortunately did not resort to such a tactic. In their dividend suspension announcement, they described the suspension as "temporary". Does that mean only one quarter? A single quarter seems doubtful, but perhaps TWO quarters is the right amount.

For me, the key realization is that the company could accomplish its catch-up by reinstating the dividend immediately at a lower level, and they are likely to do so anyway. For most shipping companies, if they want to grow but remain valued for their dividend, the dividend should be priced somewhere between a third and a half of their net income. For ONAV, that would equate to about 15-20 cents per quarter, not 50 cents. An average yield for a company like this might be 8 to 10 percent, and if ONAV yielded that amount, and limited its payout to 50%, its stock would be priced at about $10, not the $3.61 of today.

So, the stock is going to triple soon? Well, not so fast. The company is fairly opaque. Being foreign, it does not have to reveal as much about its operations as a US company, and we don't know how much insider trading there is, or even exact dates on which to expect earnings. It is a matter of confidence. The market remembers how this company stubbornly held its fixed dividend to the point of absurdity, so it may take a bit longer before the market feels OK about buying. But with a fairly steady earnings record, and priced at a third of book value, and the potential of a dividend reinstatement, and no credit problems or covenant violations, one has to take a serious look at the stock as a potentially profitable medium to long term hold.

One more intriguing bit. Notice how the stock shot up the day before the big shipper rally of 7-15 ("No known news"). Stocks which lead like this sometimes do so because they attract large, professional, strategic investors. Those are the kinds of people whose favorite stocks we all would like to own.

Disclosure: I am long ONAV.