Golden Ocean Group: Splashing Cash On Big Dividends Risks Leaving A Severe Hangover

Summary

• After years of lackluster dividends, Golden Ocean Group sent them surging during 2021 as they enjoyed booming operating conditions.
• Their operating cash flow during the first nine months of 2021 already approximately doubled any of their previous full-year results during 2018-2020.
• Whilst splashing their cash windfall on big dividends and acquisitions is not necessarily bad, the lack of deleveraging leaves them vulnerable.
• Outside of these booming operating conditions, their leverage is very high and thus they face a severe hangover when these booming operating conditions subside.
• Despite this bearish tone, I nevertheless still believe that a neutral rating is appropriate given the unpredictable nature of their industry.

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Introduction

After years of lackluster dividends that were suspended multiple times, Golden Ocean Group (NASDAQ:GOGL) sent their dividends surging as they enjoyed the booming operating conditions of 2021, which now sees their yield at a very high 16.33%, despite not even paying a dividend for the first quarter. Whilst this has undoubtedly been a welcome change for their shareholders, splashing cash on big dividends and acquisitions risks leaving a severe hangover once these booming operating conditions subside.

Executive Summary & Ratings

Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.

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*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and also best captures the true impact upon their financial position.

Detailed Analysis

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After seeing three rather business-as-usual years through 2018-2019, notwithstanding the turbulence of 2020, their cash flow performance has surged astonishingly during 2021 thanks to their booming operating conditions. This has seen their operating cash flow reach an amazing $341.2m during the first nine months of 2021, which is already approximately double any of their previous full-year results during 2018-2020. This has left quite the cash windfall, which they have seized upon to spend up big acquiring vessels with their capital expenditure surging to $406.2m that even exceeds their operating cash flow, thereby leaving negative free cash flow of $69.4m after also subtracting the relatively minor $4.4m of miscellaneous cash expenses listed underneath the above graph.

Despite already directing their cash windfall towards expanding their fleet, they have also directed vast sums of cash towards their shareholders by sending their dividends to heights not seen in many years. Their latest quarterly dividend of $0.85 per share represents a massive 70% quarter-on-quarter increase, which will cost a sizeable $170.4m given their latest outstanding share count of 200,435,621. When combined with their previous $150.3m of dividend payments during the first nine months of 2021, it sees their full-year total reaching $320.7m and thus amounts to approximately three-quarters of their entire full-year operating cash flow, assuming that their yet-to-be-released fourth-quarter results track those from the first nine months. Even though there is nothing necessarily bad in general with enjoying their good fortunes by splashing cash on dividends and acquisitions, it nevertheless leaves them vulnerable when considering their overleveraged financial position.

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It was no surprise that combining very large capital expenditure with large dividend payments has seen their net debt climb higher, which now sits at a record high of $1.275b and thus 17.42% higher than the $1.086b where it ended 2020. Although interestingly, this resulted despite a $352.2m equity issuance during this same period of time, which effectively counteracts and diminishes the appeal of their dividend payments that are a return of equity.

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When reviewing their leverage ratios, it quickly becomes apparent that their leverage has plunged dramatically with their net debt-to-EBITDA and net debt-to-operating cash flow decreasing to only 2.31 and 2.50. Unlike in previous years, this now sits within the moderate territory of between 2.01 and 3.50, although given their record high net debt, this is obviously simply thanks to their booming financial performance and as a result, it should be remembered that the fortunes of their highly volatile and unpredictable industry can change rapidly.

Even if their very high leverage ratios from the end of 2020 are ignored since the year was particularly volatile and abnormal given the Covid-19 pandemic, their leverage was still well into the very high territory at the end of 2019 with a net debt-to-EBITDA of 6.08 and a net debt-to-operating cash flow of 7.49 both being easily above the threshold of 5.01. A similar story was told by the end of 2018 with these two leverage ratios sitting at 4.41 and 5.63 respectively, thereby on average sitting broadly at the crux between the high and very high territories and thus their financial position is clearly overleveraged outside of these booming operating conditions. Since they are directing none of their cash windfall towards reducing their debt, they risk a severe hangover when operating conditions normalize and once again strain their financial position.

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Thankfully their liquidity is strong with current and cash ratios of 1.59 and 0.86 respectively, which provides a financial backstop against their overleveraged financial position and thus lowers the risks to their ability to remain a going concern. Although at the same time, this primarily rests upon their relatively very large $242.4m cash balance since they only retain a mere $50m available under their credit facility. Even though this provides ample support during 2022, they face circa $250m per annum of debt maturities during 2023-2025 that could easily drain their liquidity if any of those years coincide with a downturn, as per slide eight of their third quarter of 2021 results presentation.

Conclusion

Whilst only an anecdotal observation, throughout my last decade in the market it seems common to see notoriously volatile and cyclical industries swing from booms to busts and thus they risk a severe hangover in the future after splashing their cash windfall on dividends and acquisitions. Despite this bearish sounding tone, I nevertheless still believe that a neutral rating is appropriate given the highly volatile and unpredictable nature of the broader shipping industry.

Notes: Unless specified otherwise, all figures in this article were taken from Golden Ocean Group’s SEC Filings, all calculated figures were performed by the author.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.