The title of my article may seem odd, especially considering that the management is also the largest individual shareholder in StealthGas (NASDAQ:GASS) (Harry Vafias, the CEO, owns in conjunction with his family's Flawless Management Inc., 20.4% of the stock, according to the most recent 20-F). In fact, I initially purchased the stock in part because management had such a large stake, and thought that management would behave in a shareholder-friendly fashion.
I had little reason to think otherwise at the time (2009), also because StealthGas had accumulated a three-year record of dividend payments. In total, after its IPO in 2006 and before the 2009 financial crisis, StealthGas had paid out $2.444 per share in dividends, or multiplied by approximately 20 million shares, about $48 million.
Many expected StealthGas to suffer operationally, like other shippers, due to declining charter rates and lower vessel values. This has steadfastly not been the case: time charter rates in the latest quarter were $8,126 per vessel per day, compared to a rate of $7,174 in 2006, around the time of its IPO. The company has been profitable throughout the 2009-2012 period, earning EBITDA (excluding one time impairments, etc.) of about $54 million in 2009, $49 million in 2010, and $47 million in 2011. EBIT came in at about $39 million in 2009, $35 million in 2010, and $36 million in 2011.
So we have in essence a highly profitable company, with EBIT margins in the order of 30% ($35 million EBIT on $119 million revenues in 2011). So what's the problem?
In my opinion, the problem is management's poor choice of capital deployment, combined with a total abrogation of their concern for shareholders' desire to get paid through dividends and stock repurchases. In 2009, 2010, and 2011 management paid a whopping $238 million for new vessels, offset by $74 million of vessel sales, for net vessel purchases of $164 million. Most of this was financed through cash generated by operations ($97 million), but in addition, debt increased by about $69 million. The balance, ignoring miscellaneous payments to customers and the like, was used for mild share repurchases of $8.5 million.
In essence, therefore, you have a management that is taking all the cash generated from operations and (1) increasing leverage; (2) purchasing new-build ships from shipyards at 100 cents on the dollar; and (3) totally ignoring its shareholders, paying them only $8 million, all in the form of buybacks during this period. Keep in mind that had the company paid out just 1/10 of its cash generated form operations as dividends during this three year period, shareholders would have received about $10 million in dividends, or about a 3% annual dividend yield during this three year time frame. Had management used the $10 million to repurchase shares, the share count would have decreased by 2 million, assuming an average price during this period of $5 per share. And this is only with 1/10 of the profits generated by this company; the point is that the resources can be put to much better use by: (1) drastically reducing leverage (currently at about 50% of assets); (2) dividends; (3) repurchase of shares; (4) purchase of ships - but not newbuilds - at below 100 cents on the dollar.
It is equally frustrating that management has had three years to "right this ship" (pun intended), and yet during the most recent quarter, management expressed no intention to commit to ANY of suggestions (1) through (4) - no leverage reductions, no dividends, no repurchases (except perhaps for token repurchases), and lack of clarity for ship purchases.
My conclusion, therefore, is that management, for whatever reason, is far more concerned with grandiose "upscaling" of the fleet, empire building, and just growing the asset base, at whatever cost and expense to shareholders. For this reason I have lost my faith in management and no longer hold any shares of StealthGas.