What’s Next for the Bulk Shippers?
Posted on: September 12, 2008 - Email Article - Printable Version
Investors seeking wild volatility in recent months have been big fans of the dry bulk shipping sub-sector. The interest in these companies has exploded over the last year because of their unique relationship with commodities, the energy sector, and the materials sector. In most cases over the short and intermediate term commodity spot prices do not affect the supply and demand for these dry bulk shippers’ services. Instead, they are affected heavily by the Baltic Dry Index (BDI). You can find a summary, chart, and the level of the index here.
As you can see from the chart, it hasn’t been pretty for the dry bulk shippers as the index has come down from about $230,000 to $80,000, a drop of 65%, in one quarter. This index tracks the averages of smaller indexes that base shipping rates on the size of the vessel. The index is wildly volatile, especially over the course of the last two years. I would expect this level of volatility to continue into the foreseeable future until more companies begin to use hedging derivatives to lock in revenue streams. This is already becoming more prevalent in the industry but many of the contracts are still based off spot market pricing.
The overriding factor over the long run for the dry bulk shippers is growth. Many analysts believe that world GDP growth and developing world GDP growth will guide the long term direction of the dry bulk shippers’ stock prices. Brazil, Russia, India, and China cannot grow without raw materials and at least two if not three of the BRIC countries will be net importers of commodities going into the future. Even regions with large amounts of commodities will still have to export their commodities to other countries. As you can see, without the dry bulk shippers the world simply cannot move forward. At these levels, almost all of the dry bulk shippers are attractive investing ideas but two in particular come to mind.
Dryships
Dryships [DRYS: 6.17, -0.01 (-0.16%)] is an interesting play because it is no longer a pure-play bulk shipper. Dryships recently acquired Ocean Rig and has entered into the ultra deep water drilling market. This separates them from the rest of the competition, and in theory this acquisition should actually make the stock less volatile. In most cases dry bulk shipping companies will hedge a much smaller percentage of their revenue than drilling companies. This component should be able to tame the rapid movements of Dryships after the integration is complete. The long term fundamental outlook for the deep water drilling industry looks strong, especially since the Brazilians and Petrobras [PBR: 47.10, +0.34 (+0.73%)] have not be able to contract enough drill ships to fully exploit their deep water reserves. This transition will not be easy, the deepwater industry is controlled by the big three; Transocean [RIG: 86.07, +0.53 (+0.62%)], Noble Corp. [NE: 43.50, +0.03 (+0.07%)], and Diamond Offshore [DO: 89.56, -0.02 (-0.02%)].
Genco
Genco [GNK: 22.52, +0.56 (+2.55%)] is another of my favorite bulk shippers and possibly the best run shipping company in the industry. Their Director and Chairman of the Board, Peter C. Georgiopoulos, is one of the most respected figures in the international shipping industry. He is also the CEO of General Maratime Corp. [GMR: 8.00, +0.35 (+4.58%)] and Aegean Marine Petroleum Network, Inc. [ANW: 27.20, -0.27 (-0.98%)], other successful shipping companies. Georgiopoulos had the foresight to begin buying up tankers during the bottom of the shipping market in the early 2000s. This foresight led to massive investor returns since the initial public offering in the middle of 2005. The stock is up almost 150%, and that does not include the massive dividend that Genco provides. Genco’s dividend of almost 10% is well above industry average. Genco had earnings surprises of 15.2%, 13.7%, 10.0%, and 15.3% for the last four quarters. These numbers only further support the solid management that has brought such high levels of performance during these volatile times. The excellence in financial management has also provided investor with the safety of the dividend over the long term. I would bet highly against any form of a dividend cut especially since the stock can go back to $80.00 a share just as fast as it has dropped from those levels.
Conclusion
The attractive valuations has made it very hard to ignore the bulk shippers. Even though they are volatile, in most cases their dividends are extremely safe. In a worst case scenario where there is no equity appreciation, (I find this extremely unlikely) these stocks will still provide a nice stream of income for any investor that can stomach the risks. Since most of these companies operate internationally, investors shouldn’t be overly worried about either Barack Obama or John McCain. Since many investors are unfamiliar with these stocks, I have compiled a list of some of the more interesting equities.
- Dryships Inc. [DRYS: 6.17, -0.01 (-0.16%)]
- Genco Shipping [GNK: 22.52, +0.56 (+2.55%)]
- General Maratime Corp. [GMR: 8.00, +0.35 (+4.58%)]
- Aegean Marine Petroleum Network, Inc. [ANW: 27.20, -0.27 (-0.98%)]
- Diana Shipping Inc. [DSX: 14.89, +0.11 (+0.74%)]
- Excel Maritime Carriers, Ltd. [EXM: 6.42, -0.02 (-0.31%)]
- Eagle Bulk Shipping Inc. [EGLE: 5.83, -0.07 (-1.19%)]
- Tsakos Energy Navigation, Ltd. [TNP: 16.03, +0.13 (+0.82%)]
- Nordic American Tanker Shipping, Ltd. [NAT: 30.43, +0.12 (+0.40%)]
- Teekay Corp. [TK: 24.83, +0.46 (+1.89%)]
- Charles W. Petredis
Disclosure: The author is long NE, the authors family is long NE and PBR, the mutual fund the author manages is long NE, and the author plans to be long DRYS and GNK in the near future.
The Following Stocks Were Mentioned In This Article: ANW, DO, DRYS, DSX, EGLE, EXM, GMR, GNK, NAT, NE, PBR, RIG, TK, TNP
Comments
Do you think it’s a good long-term plan for them to kick out so much of their cash back to shareholders? One smaller cap shipper that wasn’t on your list, Star Bulk Carriers Corp. (SBLK), has a dividend yield of 15.70% — one of the largest I’ve seen. Diana Shipping Inc. (DSX) on your list had an EPS of $1.75 per share last year and a current dividend of $3.64 per share of common stock. It’s never a good signal to cut dividends, but how do these high dividend rates compromise their future growth/financial stability?
I can’t speak to all of the companies in extreme depth but in general dividends are more premium than capital appreciation. A good example is that the S&P 500 without dividends is probably going to return negative for the period of 2000-2009. The real key is as long as the business model is sustainable then I wouldn’t worry about the dividends. Remember those earnings estimates are on the bottom line and they already account for the massive CAPEX increases that these companies have undertaken this year because of all the new tanker builds. The industry won’t sustain tanker new builds at this rate over the long run and EPS growth will partially come from a decrease in the CAPEX growth rate. On top of that these equities are extremely depressed right now and these yields won’t be around for long.
Charles W. Petrediss last blog post..Foster Wheeler: Demand in the Bargain Bin
What about TBSI?!
They have fantastic upper and bottom line growth..
TBSI has had an impressive growth story going for it but I left it out because its small size makes it more risky than it’s peer group. Fundamentally they are very sound and I believe they will do well in the next up cycle.
Is there any EFT that has a basket of dry shipper companies that you are aware of?
None that I am aware of. I did a quick 5 minute search and didn’t find any, but that does not mean that there isn’t one in existence.
Are these dividident paid to common share holders or prefred share holders . also how I can purchse the preferd stocks on these companies
thanks
What is the dividend status with ocnf?
Don’t forget that with the recent election of Barack Obama and the distinct possibility of capital gains tax hikes many of the managements of these companies and all companies around the world will instead prefer share buybacks instead of dividends. Not only are the equity prices of the companies depressed, but they won’t be destroying shareholder value through dividends that have the potential to be taxed at a very high rate.
OceanFreight paid their dividend for the third quarter of 2008 on November 6th. They have now paid dividends in six consecutive quarters, and did not announce any plans to cut the dividend. However, they also did not announce any intention on keeping the dividend steady.
Since the current DVD yield is is around 60%, I believe that the future status of the payout is under question by management so I would be a cautious investor at this point.
NOV 12, 2008 – Diana Shipping (DSX) suspends dividends.
NOV 17, 2008 – Navios Maritime (NM) cuts quarterly div from 9 to 6 cents a share.
DEC 3, 2008 – Star Bulk (SBLK) pays half of dividend in stock.
DEC 12, 2008 – Ocean Freight (OCNF) cuts rate, suspends dividends.
See a pattern ? Until day rates increase significantly, I’d get out of any shipper who DOESN’T at least cut dividends to preserve capital until the economy picks up.
As an investor I don’t mind missing out on dividend yield for a few quarters while they strengthen their cash reserves. Having them dangle a div carrot to appease me & then going under and losing my principal – THAT I would have a problem with.
I own positions in NM, GNK, EXM, EGLE & DRYS.
By the by – recent shipping ETF – Claymore/Delta Global Shipping (SEA) http://www.claymore.com/etf/fund/sea Current dividend yield about 10%… might be a good play for those who think the sector will rebound & want to get in on it without worrying about investing in a single company that might not weather the current conditions.
ticket SEA is the claymore ETF that has shippers