Talk of dividends by listed shipowners is in one respect always a good thing — if only because it means they are making money and expect to keep making it.

Therefore, it is probably not surprising that dividends have been a buzzword in public markets over the past few months.

Owners in several sectors are either turning profits or anticipating better times, courtesy of improving supply-demand dynamics and the looming IMO 2020 sulphur-cap deadline.

Companies such as Genco Shipping & Trading and Star Bulk Carriers have revived their distributions for the first time in eight and seven years, respectively, while Scorpio Bulkers stacked a “special” dividend atop its regular one, even after recording a quarterly loss.

Yet dividends have not always worked as well as hoped in shipping, particularly when highly leveraged companies see unexpected downturns that strain balance sheets and force the return on capital to be curtailed.

While its wet market is rising, Teekay Tankers scrapped its dividend last month, saying it would shift resources to repaying debt and improving net asset value (NAV).

So, what can be deduced from the dividend as a tool for listed owners?

Veteran investment banker Mark Friedman of Evercore Partners has not always been a fan.

Responding to a spate of increased dividends in 2015 during what would prove to be a short-lived boom in the tanker market, Friedman described “a dividend arms race” while noting “the correlation between dividends and [improved] valuations has not been as strong as perceived”.

Four years later, he seems a little more positive on the recent declarations.

“The dividend amounts are generally being set at more conservative levels with payout ratios of 25% to 75%, rather than prior payout ratios that were higher, including some that were close to or were full payouts,” Friedman told TradeWinds.

“This sensibly allows for capital to be retained for growth or debt paydown.”

'Payouts a priority'

Alongside the dry bulk owners that have resumed dividends, a group of tanker owners including Frontline, Tsakos Energy Navigation (TEN) and Nordic American Tankers (NAT) have said higher payouts are a priority from this fourth quarter into next year, fuelled by the expected IMO 2020 benefit.

“Managements, particularly in the tanker space, are articulating a more bullish stance about near-to-intermediate fundamentals,” Friedman said.

“The recommencement of dividends is a validation of this more bullish industry view, along with a perspective that balance sheets are strong enough to withstand dividends.”

Many of the payments are variable dividends, reflecting a percentage of net profit or operating cash flow. While not unique to shipping, Friedman noted that these are still relatively unusual in capital markets.

Such dividends put an emphasis on variability and cyclicality of cash flows rather than underscoring financial strength or stability.

“That said, a variable dividend at this point of the cycle seems like a responsible and appropriate way to return capital to shareholders without overly taxing the cash flows or stressing the balance sheet,” he said.

If the cycle proves strong, investors likely will respond and allow payers to trade above NAV.

“But the valuation premium will likely last only as long as the dividends stay robust. When the cash flow and net income ceases, so too does the dividend, and along with that [come] lower valuations,” Friedman said.

Jefferies' Randy Giveans: 'Companies can reach a whole new investor class' Photo: Joe Brady

Jefferies equity analyst Randy Giveans echoed Friedman in finding a likelihood of better valuations for dividend payers, with little downside for the companies.

“As for dangers ... not much, other than increased expectations for future payouts,” Giveans said. “And if there is ever a cut, the stock price would be negatively impacted. That said, a small or short-term dividend usually is better than no dividend at all.”

Stronger valuations

An analysis of stock prices and NAVs for New York-listed owners, carried out by Jefferies,at TradeWinds’ request, seems to support the notion of stronger valuations for dry bulk owners that choose dividends.

However, the benefit is less clear for tanker owners, with even some indication those with shareholder payouts have underperformed.

A group of six tanker owners — DHT Holdings, Euronav, NAT, TEN, Ardmore Shipping and Scorpio Tankers — with dividends have seen shares improve an average of 41.7% over the past three months, and 31.2% over the past year.

Yet, this is lower than a group of four non-payers — International Seaways, Frontline, Teekay Tankers and Diamond S Shipping — that has logged gains of 60.8% and 61.1%, respectively over the same periods. Frontline and Teekay have paid dividends historically, but not recently.

The trend carries over to NAVs. Payers have gained 22.6% and 25.8% over the past three months and 12 months, against 38% and 71% for non-payers.

On the dry bulk side, results are more in keeping with conventional wisdom.

Owners with dividends — Genco, Navios Maritime, Scorpio Bulkers and Star Bulk Carriers — have appreciated 3.3% and 3.2%, respectively.

Losing ground

Meanwhile non-payers Diana Shipping, Eagle Bulk and Safe Bulkers have lost ground — 6.8% and 9.1% over three-month and 12-month periods.

On an NAV basis, the dividend group gained 3.8% and 13.6%, while the others lost 4% and 5.4%.

Even with that mixed record, history suggests tanker owners also benefit from dividend payouts.

Two of the owners that spent long periods trading at substantial premiums to NAV — Frontline and NAT — were known for generous shareholder payouts.

“The best example of a company getting a premium for dividends is NAT — it traded at more than 200% of NAV in 2016 when it was paying big dividends,” Giveans said.

Companies with dividends also broaden their potential shareholder base.

Some investors simply demand them.

"Companies can reach a whole new investor class," Giveans said. "I'd say in my time on the road to meet with investors, probably one-third say they need to see at least some [dividend] yield before they can invest.

"It also helps keep some of the shorts at bay, because investors who want to short a big dividend payer are going to owe the dividends on that stock."