Diana Shipping (NYSE:DSX) has a reputation for conservative management and a "fortress balance sheet." Unfortunately, the fortress has been battered as dry bulk shipping rates hit historic lows. DSX still has almost $200 million in cash and far less balance sheet leverage than most shipping sector peers. Although it remains at a very depressed level, the Baltic Dry Index has bounced over the past month. Many shipping issues have rallied sharply off their lows. This may be the right time to consider speculating in the deeply discounted DSX-PB preferred stock issue.
DSX-PB is a par $25 cumulative preferred issue. It has an 8.875% coupon and dividends are paid quarterly. See prospectus for additional details. DSX-PB now yields 18.7% at a recent price of $11.90. In addition to the high yield, a large capital gain is possible if the dry bulk sector eventually recovers. Here are ten reasons why DSX-PB has speculative potential:
1. There are "green shoots" in the shipping sector
The BDI is a current indicator, but shipping stocks are a leading indicator. Strong rallies in some dry bulk shipping stocks suggest there may be light at the end of the tunnel. Safe Bulkers (NYSE:SB) and Star Bulk Carriers (NASDAQ:SBLK) have more than doubled since hitting 52-week lows earlier this year. Scorpio Bulkers Inc. (NYSE:SALT) has nearly doubled. Shipping preferred stocks and exchange traded debt issues have also participated in the recent rally. GSL-PB is up 80% from its 1/20/2016 low, SB-PD has rallied 74% since its 1/15/2016 low and SLTB has surged 95% since its 2/26/2016 low.
Perhaps the broad rally in these shipping stocks may be due to expectations for an improving global economy. Perhaps it's due to moderately higher oil prices. Ship speeds are reduced to conserve fuel (increasing the demand for ships) as oil rises. Regardless of the reason, preferred stock holders should take notice when common stocks start to rally.
2. Equity market capitalization and balance sheet leverage matters
DSX has a market capitalization of $190 million and the DSX-PB preferred is senior to the common stock. The DSX equity market capitalization compares favorably to other dry bulk shipping peers with similarly sized fleets. Safe Bulkers has an equity market capitalization of only $60 million and Star Bulk Carriers Corp. has a $147 million equity market capitalization. Even after last week's $63 million equity capital raise, Scorpio Bulkers Inc. still has only a $155 million equity market capitalization.
DSX has a fleet of 49 dry bulk ships (including vessels under construction, net of expected sales) as compared to 43 for SB, 73 for SBLK and 58 for SALT. Equity market capitalization per dry bulk ship provides a quick and dirty way to compare balance sheet leverage. This is only a rough metric since I am not adjusting for the differences in fleet age, ship condition, ship type or attached charters. DSX has $3.9 million of equity market capitalization per ship as compared to $2.7 million per ship for SALT, $2 million per ship for SBLK and only $1.4 million per ship for SB. Unless you believe that Mr. Market's equity valuations are "wrong," this rough calculation illustrates that DSX is substantially less leveraged than these peers.
3. DSX is buying ships while weaker peers are selling
To ensure their survival, peers such as SALT and SBLK have been forced to dump ships at the bottom of the market cycle and make dilutive equity offerings. As one of the few companies that still has financial flexibility, DSX has been picking up a few ships at bargain basement prices. These recent ship purchases suggest that DSX is in a stronger financial position than peers.
4. Strong liquidity makes a near-term deferral unlikely
As of 12/31/2015, DSX had $193 million in cash with no significant near-term debt maturities. The Export Import Bank of China has already provided financing for the 3 newbuilding ships to be delivered in 2016. Given this strong liquidity position, a near-term deferral of the DSX-PB dividend appears unlikely. The risk of a deferral will increase if shipping rates remain depressed into 2017. Note that DSX-PB is a cumulative issue. As long as DSX survives the downturn, deferred dividends would accumulate until market conditions improve.
5. Insiders have a stake in DSX-PB
As per the 2014 annual report (see page #82), insiders own 93,970 shares of DSX-PB representing 3.6% of the outstanding total. It's always comforting for income investors to see that management has preferred stock holdings. Officers and directors as a group also own 23.7% of the common stock (see page #81).
6. DSX-PB is undervalued relative to the SB preferred issues.
At a recent price of $11.08, SB-PC is trading for only 82 cents less than DSX-PB. As shown in item #2, SB has far higher balance sheet leverage than DSX.
7. DSX-PB has more speculative potential than DSXN
DSXN is a par $25 exchange traded debt issue with an 8.5% coupon maturing on 5/15/2020. See prospectus for additional details. Lion Square Investments Ltd. profiled DSXN in this recent article. The DSXN debt issue has less risk than DSX-PB and should trade at a premium. Both issues will do well if DSX survives the shipping sector downturn. However, DSX-PB has more speculative potential since it has sold off much further than DSXN as illustrated below:
Date DSXN Closing Price DSX-PB Closing Price Difference
9/1/2015 $23.53 $23.05 $0.48
10/1/2015 $20.63 $20.00 $0.63
11/2/2015 $22.91 $21.49 $1.42
12/1/2015 $16.63 $14.16 $2.47
1/4/2016 $19.15 $14.50 $4.65
2/1/2016 $17.24 $12.83 $4.41
3/1/2016 $17.36 $10.95 $6.41
3/23/2016 $17.98 $11.89 $6.09
8. Focus on medium to longer-term charters
DSX typically leases vessels for 12-16 month time charters. This strategy can be advantageous when short-term spot leasing rates are especially weak (as is now currently the case).
9. Most revenues are already locked in for 2016
Thanks to the focus on medium to longer-term charters, 64% of 2016 revenue days are already locked in at fixed rates. DSX has more visibility than peers such as SALT, SBLK and SB that have greater exposure to volatile spot market rates.
10. DSX has access to capital
DSX has not raised capital during the downturn, while peers SALT and SBLK have already severely diluted their equity holders. However, DSX still does have the option to raise capital. A company's equity market capitalization provides a good indication of its ability to sell additional equity. As noted in item 2, DSX is better positioned to sell stock (if necessary) than peers. Such a capital raise would dilute DSX holders, but be very positive for DSX-PB holders. The increasing possibility of a dilutive equity offering makes DSX-PB a better way to bet on a shipping recovery than DSX.
My Panick Value Research Report is focused on high-yield preferred stocks and exchange-traded debt issues. Based on some leading indicators, DSX-PB may be of interest to investors with a high risk tolerance. Those owning SB-PC and SB-PD should strongly consider swapping into DSX-PB, which has substantially less balance sheet leverage and is trading at only a slight premium. DSX-PB is riskier than DSXN, but the large premium for DSXN limits its speculative potential. DSX holders should consider swapping into DSX-PB to avoid the growing risk of dilution. Sophisticated investors may wish to consider pair trades such as long DSX-PB/short DSX.
Disclosure: I am/we are long DSX-PB,SBLKL,SLTB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.