Scorpio Tankers: Dividend Going, Going, Gone!

| About: Scorpio Tankers (STNG)

Summary

Scorpio (almost) abandons fixed dividend policy reflecting adverse market conditions.

Cut underscores difficulty for dividend policies to survive through the tanker cycle.

Stock has reacted positively but has long way to go before it regains lost ground.

Scorpio Tankers (NYSE:STNG) has made a dramatic shift in its fixed-dividend policy. It cut its quarterly dividend to a nominal $0.01 per share for the fourth quarter of 2016. Prior to the cut, the company had declared a dividend of $0.125 per share for seven consecutive quarters. During that time, it had staunchly defended the stability of its fixed dividend payments over variable models that were adopted by a large number of its peers.

The dividend cut, along with equally drastic reductions from companies with variable models, underscores how difficult it is to set a dividend policy that can survive through tanker market cycles.

Now Scorpio has apparently deemed the $80m in annual savings from the dividend cut could be deployed more efficiently elsewhere. Scorpio president Robert Bugbee told Lloyd's List that "the cut provides Scorpio with optionality." He was, however, short on details as to what those alternative uses might be.

Notwithstanding the value of optionality, the dividend cut is a reflection of deteriorating profits over the past seven quarters. A closer look into adjusted earnings before interest, taxes, depreciation and amortization, tells us why that is indeed the case.

Adjusted ebitda is typically used by shipping companies to measure their operating performance, although it is a pro-forma figure that is not prepared in accordance with generally accepted accounting principles.

Scorpio had reported adjusted ebitda of $86.4m for the first quarter of 2015. After hitting a peak of $150.8m during the third quarter of 2015, reported adjusted ebitda steadily deteriorated, dropping to $30.0m for the fourth quarter of 2016.

Maintaining the $0.125 dividend per share would cost Scorpio $21.8m per quarter, thus leaving little room to service its debt from operating profits, assuming that current market conditions will persist.

That is why the dividend cut came as no surprise to many analysts who cover the company. Several of them had actually forecasted such move and applauded the company for doing so. This might also be the reason why the stock market not only shrugged on the news, it actually bid the shares up.

On Monday, after Scorpio reported its results and announced the cut, its shares rose 10.6% to $3.96. They were trading still higher at $4.31 at midday on Tuesday. Mr Bugbee pointedly told Lloyd's List that judging "by the stock price's response it is pretty clear that the dividend cut was seen as the right thing to do".

Although this is an impressive two-day run, the shares are still down year-to-date. They are also a far cry from $9.97, the closing price when Scorpio had first declared a $0.125 dividend on April 27, 2015.

Scorpio's stock may be on the right path, but it has a long way to go before returning to its previous peak.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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