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Summary

  • Diana Containerships is a small-cap company operating in the containership industry, owning only 8 container vessels.
  • Charter rates are historically low leading to weak financial results and a poor outlook for the next few years.
  • Even though the company has slashed its dividend by 50% in 2013, it still offers a very attractive yield of 15%.
  • However, its dividend does not seem sustainable over the long-term and for more risk-averse investors it should be avoided.

The containership industry offers a few high-dividend yield plays, like Costamare (NYSE:CMRE) which I've covered recently. Another interesting opportunity may be present on Diana Containerships (NASDAQ:DCIX), a small-cap company that currently offers a juicy dividend yield of 15%. However, as usual with high-dividend yielders it may also be a trap. Diana Containerships has a market capitalization of about $137 million, and is traded on the NASDAQ.

Diana Containerships is a Marshall Islands corporation founded in 2010 to own containerships and pursue containership acquisition opportunities, following the spin-off from Diana Shipping (NYSE:DSX). Its main shareholder is still Diana Shipping with an equity stake of 10%. Its main competitors include Costamare, Seaspan (NYSE:SSW), and Danaos (NYSE:DAC).

The company currently owns eight container vessels (2 Post-Panamax and 6 Panamax), after its recent decision to scrap one vessel due to unfavorable charter rates. During 2013, it reconfigured its fleet with an emphasis on adding more modern vessels. It bought three container vessels and sold four vessels for demolition. These vessel sales were mainly due to eliminate capacity that could not be operated economically. Nevertheless, the company's strategy is to continue to capitalize on investment opportunities by purchasing additional containerships in the second hand market and may also invest on new containerships.

Diana Containerships' fleet average age is about 10 years, which is relatively good for an asset that typically has a useful life of around 30 years. However, the company has decided over the past few months to scrap containerships less than 20 years old, so it may need to continue to invest on younger, modern containerships to keep competitive. All of its fleet is currently employed under a charterer agreement, but its average employment period is quite low at about 1.5 years, exposing the company to charter rate renewal risk. For comparison, Costamare's remaining time charter duration is on average about 5 years, providing much more future revenue visibility. Diana's vessels are employed on time charter to a group of seven liner companies. Its customer concentration is high and should continue to be for the foreseeable future, as the liner industry is dominated by a small number of players. Its main customers include A.P. Moller-Maersk A/S (OTCPK:AMKBY), Nol Liner, CSAV, beyond others.

The ocean-going container shipping industry is both cyclical and volatile in terms of charter rates and profitability, being the global GDP growth rate one the primary drivers of containership demand. Containership charter rates peaked in 2005 and generally stayed strong until the middle of 2008, when the effects of the economic crisis began to affect global container trade, driving rates to their 10-year lows. In late 2009 and 2010 there was an improvement, but demand has remained soft since then. Moreover, the industry's fleet growth rate has outpaced demand over the past few years, leading to negative pressure on containership rates. Global GDP growth is expected to pick up slightly in 2014 and can lead to higher containership rates in the short-term, but unless growth surprises considerably to the upside, containership rates should remain stable in next few years.

Regarding its financial performance, Diana Containerships has reported relatively weak results over the past few years. In 2013, its revenues decreased by 4.5% to $54 million. Its EBITDA was $17 million, 25% lower than in 2012. Its EBITDA margin was 31.5%, much lower than its 37% achieved in 2012 and considerably lower than Costamare's 66% EBITDA margin. Moreover, the company's net profit was negatively affected by losses on vessel sales and goodwill impairments of $58 million, leading to a net loss of $57 million for the full year. Without these non-recurring charges, the company's net profit would have been $1.5 million, which continues to be unimpressive. Going forward, unless global GDP growth surprises to the upside over the next few years leading to higher demand for containership transportation, the company's financial performance should not improve markedly in the medium-term.

Diana Containerships declares a variable quarterly dividend each February, May, August and November equal to a substantial portion of available cash from operations during the previous quarter. Therefore, its dividend may be volatile and in certain quarters the company's cash generation may not enough to pay expenses, resulting in a dividend suspension. On the positive side, under Marshall Island law, there is no dividend withholding tax imposed on payments to its shareholders. Since its inception, Diana Containership has increased its dividend three times, until in mid-2013 it slashed its quarterly dividend in half, from $0.30 to $0.15 per share. For the past three quarters, it has paid an unchanged dividend of $0.15 per share, or $0.60 annually. At its current share price, Diana Containerships' offers an impressive dividend yield of 15%.

This high-dividend yield is clearly attractive, but it does not seem sustainable over the long-term. In 2013, it reported a net loss so its dividend payout ratio isn't meaningful. In the previous year the payout ratio amounted to 450%, which is an absurd level and was a warning sign of the dividend cut that followed. Going forward, the company is not expected to produce enough earnings to keep its current dividend, so further dividend cuts may lie ahead.

Like its peers, Diana Containerships has high debt levels given that its net debt amounted to about $80 million at the end of 2013, or a net debt-to-EBITDA ratio of 4.71x. Even though its leverage ratio is lower than for Costamare, its older fleet and much lower remaining employment period, makes Diana Containerships' debt levels much more worrying in the medium-term. As it may be difficult for the company to increase its debt ratios further, more equity issuance or dividend cuts are likely over the next few years.

Conclusion

Diana Containerships' dividend yield is extremely high, but it should also be the first sign that its sustainability should be questioned. For income investors it may be appropriate as a speculative bet, offering a very high return if the industry's fundamentals improve over the next few months. However, due to its volatile business and weak outlook, it is a high-risk bet and should therefore have a small weight in the portfolio. Also, for those who don't want to see dividend cuts and are concerned about regular income, Diana Containerships' yield is indeed too good to be true and should be avoided.

Source: Is Diana Containerships' 15% Yield Too Much Good To Be True?