Just when shipowners were looking at the IMO 2020 fuel-cap mandate to provide a steady long-term lift to freight markets, Covid-19 threw the playbook out of the window.
Dry bulk and containership markets cratered, while tankers packed an expected two years of buoyant rates into two months of steroidal gains built on a global fuel glut.
For the short term, some public owners reconsidered the notion of paying quarterly dividends to their shareholders, opting instead to preserve precious cash on the balance sheet.
But then the script flipped.
Bulkers and boxships began a tentative comeback in the second half of 2020 that would mushroom into decade-long rates peaks by the summer of 2021.
Meanwhile, tankers tanked, sinking into a year-long trough of putrid hire rates that has yet to abate.
Suddenly dividends were back on the dry side as public owners confronted the mountains of cash flowing into their coffers, while tanker owners faced the tough choice of eliminating them to get through the crisis.
“Understandably, most tanker companies cut dividends as the market has weakened dramatically over the past 12 months, whereas most dry bulk and containership companies increased dividends or started new policies as those markets have strengthened substantially,” says Jefferies lead shipping analyst Randy Giveans.
One of those on the fortunate side of that calculation is Greek bulker owner Star Bulk Carriers, whose president, Hamish Norton, was previously a career investment banker.
With a rampaging dry market showing few signs of reversing, Star is expected by Jefferies to distribute as much as $4 per share for all of 2022 under its high-payout model.
But as Norton tells TW+, the return to robust payouts is the result of a new model adopted before the pandemic that was never abandoned, but rather tweaked a bit as the owner transitioned to better markets.
“The dry bulk market never fails to astonish me. The collapse was quicker and more robust than I had imagined and the recovery was quicker and more robust than I had imagined,” Norton says.
“We adopted our dividend policy in late 2019. Then Covid hit shortly thereafter and the market looked very bad for a while.
“Our dividend policy was never put on hold. But the fact is that with the low charter rates as a result of the beginning of the Covid pandemic, the calculation built into the policy resulted in no dividend for a while.”
‘They’re using lower leverage, which is sound’
Star felt better about the market come May 2021, and that’s when some tweaking ensued.
Management amended the dividend policy to take into account cash on the balance sheet from the refinancing of many vessels in 2020 — a consideration not allowed under the original formula.
The change allowed a $0.30-per-share payment in the first quarter and $0.70 for the second quarter.
But even as analysts are watching for those numbers to increase, Star needs to satisfy an escalating threshold for a cash reserve on its books.
The number was $1.65m per bulker in the second quarter, rising to $1.9m for the third and $2.1m for the fourth.
“Considering we have 128 ships, that’s a lot of cash,” Norton said.
“The board wanted to build up the cash balance over a reasonable period of time while paying a dividend. Basically, after the dividend with respect to the fourth quarter, there’s no more required increase in the cash balance. So with similar charter rates the dividend could be larger.”
Star’s cash-reserve policy demonstrates what veteran banker Mark Friedman of Evercore sees as a difference between shipping dividends in 2021 and a time like 2005-2009, when, in a boom cycle for rates, owners were not as cautious.
We feel the entire industry needs a more disciplined approach. We think you do have to pay out a substantial dividend to get the valuation you want
“What’s the difference this time? I think many of the dry bulk and containership companies first are reducing their debt and then are ensuring their longer-term flexibility to pay dividends,” he says.
“I think Star Bulk, for example, has as a priority the strengthening of its balance sheet, which has the positive impact of being able to be more reliable in paying out a dividend.”
This also explains why other dry bulk owners such as Safe Bulkers and Eagle Bulk Shipping are taking their time before trotting out their own payouts.
“It’s one reason why there might be a little pause before the rush of dividends. The shipping companies have gotten more prudent about strengthening the balance sheet first and making the distribution second,” Friedman adds.
In 2005-2009, public owners were more comfortable stretching their balance sheets to make high payouts, feeling they could turn to readily accessible equity markets to raise capital when necessary.
“Sensibly, companies are more conservative about what their capital markets access is today. They’re using lower leverage, which is sound,” Friedman says.
It’s all about low leverage for the other dry bulk company transitioning to a high-payout dividend model, according to Genco Shipping & Trading of New York.
Genco chief executive John Wobensmith is a veteran of dry bulk’s bull run between 2005 and 2009, the last era of significant dry dividends.
“This was during a time of non-amortising debt that drove valuations but also led to a lot of companies blowing up” when rates plummeted, he recalls.
While many dry bulk owners report lower leverage in the current bull cycle, it is important to distinguish between those that are actually reducing debt as opposed to benefiting from higher vessel valuations, he argues.
Genco is one of the former, as it pursues a target of $250m in debt by year’s end and an ultimate goal of zero net debt, according to Wobensmith.
Industry ‘needs to be more disciplined’
“We feel the entire industry needs a more disciplined approach,” he tells TW+. “We think you do have to pay out a substantial dividend to get the valuation you want. You want to get away from being valued on a NAV [net asset value] model and get to being valued on cash flow.
“But the only way you get to a cash flow model is to put your hand on your heart and say: ‘We’re never going to turn this dividend off, even in a lower market, and we know we will experience lower rates again’.”
Genco plans to start the high-payout model in the next quarter, with first distributions in the first quarter of 2022.
Jefferies projects that it could amount to $3 per share for all of next year, depending on the size of a mandated cash reserve.
Genco and Star Bulk are adamant that an important feature of their payouts will be that they are predictable: they can be calculated by investors in advance based on each company’s benchmarks.
“I think it’s paramount. While we may not be able to predict freight rates, we can tell investors what our expenses are, the amount of our reserve and of course our debt repayments,” Wobensmith says.
Norton adds: “I think investors and analysts thrive on predictability. In a perfect world, we could provide predictability and no volatility. But in dry bulk there will always be volatility. At least we can deliver predictability.”
Not surprisingly, Giveans cites this as his top priority for dividend payers: “We prefer dividend policies which remove as much ambiguity and subjectivity as possible.”
It is not just dry bulk companies that are ramping up dividends. Containership owners and operators are benefiting from some of the highest charter rates in history.
“Zim recently increased its 2021 Ebitda guidance to $4.8bn-$5.2bn and will pay out 30%-50% of its 2021 net profits in early 2022. We expect the 2021 dividend for Zim to be somewhere between $9 and $15 a share. Additionally, Zim already announced a $2-per-share special dividend to be paid in September 2021,” Giveans says.
Larger dividends also might be expected from containership lessors Danaos and Global Ship Lease, Giveans projects.
For tanker owners, the question has been the opposite: whether to suspend dividends to preserve cash.
According to Jefferies, five of the seven tanker owners under Giveans’ coverage that paid dividends in the second quarter of 2020 had reduced or eliminated them by a year later.
Among those that stayed the course is Scorpio Tankers, which maintained a $0.10 fixed quarterly payout despite a scolding from Deutsche Bank analyst Amit Mehrotra, who said it should be scrapped to preserve liquidity.
Another owner, dividend champion Nordic American Tankers, has kept paying a dividend while running an operating loss, selling shares to fund the payouts.
Giveans doesn’t favour persisting with a dividend for owners that are going through a negative or trough market.
“No investor says, ‘The sector stinks, the outlook is bleak, the balance sheet is stretched, but the company pays a dividend so I will buy the stock’,” he points out. “Investors want to see shareholder returns in good times, but the benefit is minimal in bad times.”
- The No Normal: Dry bulk had better get used to coping with volatility
- Wine to water: 20 questions with Esben Poulsson of the ICS
- Shipping finds itself fast-forwarded into a digital future
- Cruise is setting sail on an ocean of debt, so why is it so optimistic?
- That’s oil, folks! The sun is slowly setting on tankers