The main requirement for investing in the U.S equity markets these days seems to be a blind faith in the Fed and a slow Internet connection. Don't want any bad news to come across your screen in real time. The main requirements for investing in shipping stocks, however, are numerous: a slide rule, an HP scientific calculator, and a bottle of fine bourbon. These names are not for the faint of heart, but there is one antidote to volatility: dividends. As the motto of my firm is, "cash flow never lies."
Love 'em or hate 'em, the managements of shipping companies are, as a group, as efficient with their capital as any teams I have encountered in nearly 30 years of researching stocks. This is due to the batch nature of capital allocation. You can't buy a quarter, half, or two-thirds of an oil tanker. It's an all-or-nothing deal.
For instance, DHT Holdings (DHT) , which I highlighted in my RM column last week, generated $128 million in EBITDA from a record $152.5 million in net revenues in the March quarter, and only recorded $3.1 million in capital expenditures in the quarter. So, with EBITDA margins of nearly 80% and maintenance capex requirements of 1%-2% of revenues, these ships are free cash flow machines in times of elevated rates. While rates to charter an oil tanker have shown a remarkable roller coaster pattern for the past three months, there's no arguing the fact that the prevailing rates are much higher than they were at this time last year.
For most companies, such windfalls generate a "so what." Amazon (AMZN) has had an extraordinary run of revenue growth spurred on by the Covid-19 lockdowns, but Jeff Bezos is giving you, the investor, the same amount in May 2020 as he did in May 2019 and May 1999. Nada.
Shipping companies are different, as shown in the table below. These dividend increases are extraordinary. But are they sustainable? I have listened to management calls from DHT, Navios Maritime Acquisition (NNA) and Euronav (EURN) this week (I am eagerly awaiting Nordic American Tankers' (NAT) earnings presentation on May 18th) and the answer seems to be a qualified "yes." None of the top executives on these calls described floating storage (using oil tankers to hold cargoes and wait for higher prices) as a passing fad. In fact, Euronav's CEO Hugo De Stoop noted this morning his belief that floating storage "is just getting started."
Shipping rates have such a boom-bust tendency that much of the financing that was available in the 2004-2007 time period when I first started playing these stocks has simply disappeared. So, there has been no repeat of the heady days in 2005 when dry bulk ship owners were ordering new ships from shipyards that were under construction.
According to Navios CEO Angeliki Frangou, it's nearly impossible to sell a ship these days, anyway, because the crews are not allowed off them owing to Covid-19 concerns. Older ships are much more expensive to operate now given the IMO 2020 low-sulfur fuel requirements, and the additional supply to mop up crazy levels of demand will not materialize.
So, the proof is in the payouts. I am not talking about ridiculous measures used by Silicon Valley-types to justify swollen valuations. For instance, Tesla (TSLA) burned through $920 million in cash in the March quarter but reported "Adjusted non-GAAP" net income of $227 million. Anyone who has ever operated anything more complex than a lemonade stand knows which number is more important. Shipping companies are rewarding shareholders with real, cash payments via dividends. There has been a windfall in profitability in this industry that, to their credit, none of the management teams are taking credit for predicting. But none of them believe it is ending, either.
So, with excess cash in hand they are giving it back, and that is why I am in these stocks despite the extraordinary volatility. The bourbon helps, too.
Here are the figures. Note that Euronav announced a shift to a quarterly payout from an interim payout, so a year-on-year dividend comparison is not possible. I will talk about ways to get these payouts (AKA dividend capture strategies) in my RM column tomorrow.
| Company | 1Q2020 Dividend | 1Q2019 Deividend | 5/7/20 Share Price |
| DHT Holdings | $0.35 | $0.08 | $6.40 |
| Euronav | $0.81 | n/a | $10.00 |
| Navios Acquistion | $0.30 | $0.02 | $5.00 |
| Nordic American | $0.14 | $0.03 | $4.80 |
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