Publicly listed tanker and bulker owners are likely to go separate ways when it comes to strategies to boost share prices and investor interest in 2020.

Tanker owners are tipped to increasingly use quarterly dividends, while dry bulk companies continue to buy back shares, according to equity analysts and other financial sources.

The choice is largely down to how the stocks are trading in relation to their net asset values (NAVs), analysts say.

Taking stock

“Based on stock prices, financial leverage and outlooks today for the [operating] subsegment, we would expect most tanker companies to pursue the dividend route and most dry bulk companies to be more active with buy-backs,” veteran Evercore ISI analyst Jonathan Chappell said.

Chappell’s forecast was echoed by his Jefferies counterpart Randy Giveans.

“I think we’ll see both, but mostly dividends for tanker owners now that they’re trading close to NAV,” Giveans said.

“Multiple tanker companies either already have announced increased dividends or formal dividend policies, or will do so during this upcoming earnings season.”

While analysts are in the process of updating company NAVs to reflect recent changes in cash flow and asset values, it is clear that most dry bulk and LNG owners are trading below NAV, Giveans added.

Why does NAV make a difference?

At least in theory, it makes sense for companies trading below NAV to buy back their shares at a discount — especially if they fund the purchases through selling some assets, as has been the case in recent months with dry bulk player Diana Shipping.

The assets are sold at NAV while the shares are taken back at a discount. Thus, the discrepancy is accretive to the balance sheet of the shipowner.

But when shares trade above NAV, the equation flips. It becomes more efficient for owners to use their premium-priced stock to buy vessels at NAV — again leveraging the discrepancy. Buying shares at this price point, in contrast, destroys value.

Amit Mehrotra, lead analyst at Deutsche Bank, is not amused by share buy-backs in shipping Photo: G Morty Ortega

That is where dividends — a regular return on investors’ capital — can become a preferred option.

Chappell says the valuation question plays a large role, “but I think the buy-back versus dividend capital-allocation question should be viewed on a case-by-case basis,” while also considering market outlook and leverage.

However, Deutsche Bank analyst Amit Mehrotra is less positive on the use of buy-backs, arguing that they generally do not work for shipping. He said: "Buy-backs may make sense on paper, but practically speaking they aren’t helpful, and we believe [they] end up costing shipping companies more money over time in the form of lower valuation relative to NAV.”

The reason? Trading liquidity. Many public shipowners have such small market capitalisations that daily trading volumes fall well short of what is expected by larger institutional investors.

Even larger-cap shipowners can be closely held by principals — another way in which share turnover is constricted.

'Counterproductive'

“Buying back stock shrinks what is already a small share capital base — it’s counterproductive,” Mehrotra said.

Shipowners are better off focusing on what Mehrotra calls “sustainable levers” to drive equity values above NAV. And then dividends can come into play.

“But not all dividends are created equal,” Mehrotra said. “Dividends need to be neutral to the capital structure. Payments should go to equity holders only after debt service and repayment obligations have been satisfied.

“Put another way, dividends need to be a return on investment rather than a return of investment,” he said.

This sort of criticism has in the past been aimed at one of shipping’s most-famous dividend payers: Herbjorn Hansson’s Nordic American Tankers.

Analysts and other critics charged that it was so hellbent on keeping its quarterly dividend streak alive that it kept paying out even as it lost money on operations.

One public company executive experienced with dividends and buy-backs pointed out that the latter increase a company’s NAV, but not necessarily its share price.

“Dividends are more likely to make income-oriented investors buy the shares and drive the share price up, but of course they do nothing good or bad for NAV per share,” he said.

“There is no perfect answer. But if one expects the dividend will get the share price above NAV in the reasonably near future, that is how I would go.”