Streetwise: Dry bulk owners are paying big dividends, but is their strategy doing likewise?

Last year was the one for the return of the dividend for listed owners in dry bulk, but has 2022 seen them reap the benefits in terms of shareholder support for stock prices?

That is less clear, to say the least, although finance experts make the case to Streetwise that it may still be premature to expect what is termed an upward “re-pricing” of the sector until investors see more.

On the one hand, six US-listed owners with some sort of dividend back in place have all logged moderate-to-strong gains in share price for the year to date.

The gainers are led by two owners with smaller payouts: Diana Shipping of Greece and Pangaea Logistics Solutions of Rhode Island, which are up 49% and 45%, respectively.

The market’s three biggest payers have made smaller gains: Eagle Bulk Shipping at 18%, Star Bulk Carriers at 15% and Genco Shipping & Trading with 7.8%.

Also logging advances were John Fredriksen’s Golden Ocean Group at 21% and Greek owner Safe Bulkers at 1.3%.

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But on the other hand, dividends have not been a magic potion — at least not yet — for the problem of public owners trading below their own steel value.

When US investment bank Jefferies initiated coverage on 24 shipping companies on 20 July, the average trading level of six dry owners under coverage was 69% of net asset value. Leading the pack were Star Bulk — the trade’s biggest shipowner — and Golden Ocean at 85% each.

In contrast, tanker owners who have spent most of the past two years treading water traded at an average 80% of NAV in Jefferies’ estimates.

Another way to measure the so-far-sluggish reaction of investors to the dry bulk dividends campaign is in yields — the ratio of the annual payout to the prevailing share price.

In other, less-cyclical industries, a dividend yield of between 2% and 6% is typically viewed as a reasonable target range for sustainable payouts.

While shipping’s boom-or-bust nature makes a direct comparison to other industries difficult, it is safe to say shipping’s yield numbers remain high.

Big-payer Star Bulk, for example, is dishing out a dividend yield approaching 25%, Diana and Golden Ocean around 18% and Eagle Bulk near 17%. Genco is a bit lower at just over 11%.

An executive for one of the peer companies tells Streetwise that his company has paid only a handful of dividends under the more-robust model.

“Let’s see what happens in a year,” he said.

Another executive whose company is paying strong dividends admits the picture could be more clear.

“I think it’s hard to tell,” he said. “Our stock is trading at a big discount to NAV, as is the entire sector. It’s frustrating to see the market doesn’t differentiate more between the companies.”

Investor doubts

Yet he also noted that because most of the large dividends are variable rather than fixed, investors tend to discount them. They don’t think, for example, that the $1.65 per share recently paid by Star Bulk for a quarter, or the $2 paid by Eagle Bulk will be sustainable as rates come off the boil.

Reassuring investors that dividends will be paid throughout cycles has been a mantra of Genco chief executive John Wobensmith, who has been working to slash debt and lower operating break-evens.

Deutsche Bank analyst Amit Mehrotra: ‘Institutional investors respond to consistency.’ Photo: Capital Link

Wobensmith also observed that Genco, in the previous bulker supercycle between 2006 and 2008, paid a double-digit yield for the first four quarters before the stock price responded strongly and the yield dropped to single digits.

One equity analyst who is a big fan of Star Bulk also counsels patience. The owner may be on pace to pay $6.60 on an annualised basis but no one thinks this is possible long term, said Amit Mehrotra of Deutsche Bank.

“We are on the record saying $4 on a mid-cycle basis is more reasonable, which would put the dividend yield at 15%,” he said.

“But the market is debating this. We went through a 10-year downcycle. The memory of that is not going to fade with a few quarters of high dividends. It’s going to take quarter-after-quarter of consistent performance. Institutional investors respond to consistency.”

More ship-finance news

Japan’s SBI Leasing has agreed a bareboat charter deal for two stainless steel chemical tankers with Singapore-based MOL Chemical Tankers. Click here to read.

Pangaea Logistics Solutions used a 29% year-over-year rates increase to notch record results for the second quarter. Click here to read.

Atlas Corp, the parent of container leasing giant Seaspan, looks set to go private after existing shareholders tabled a bid to acquire all outstanding shares in the company. Click here to read.

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