DryShips (DRYS) has undergone a dramatic transformation over the past year. The company has jettisoned vessels to pay down debt, secured capital to shore up its balance sheet, and recently started rebuilding its fleet. DryShips is apparently so confident that it's back on solid ground that it recently announced the initiation of a quarterly dividend. However, the underlying numbers tell an entirely different story, suggesting this dividend is not on solid ground.
Digging into the declaration
DryShip's new dividend policy is unique, to say the least. The company stated that it would pay a regular fixed quarterly dividend of $2.5 million to holders of its common stock and will determine the amount per share based on the number of outstanding shares it has on the record date. In addition to that quarterly fixed rate, the company may also pay an additional amount each quarter depending on market conditions and its financial performance.
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That means that at a minimum, the company will distribute $2.5 million across as many shares of common stock that it has outstanding, which could vary from quarter to quarter. For example, as of Feb. 7, when the company reported fourth-quarter earnings, it had more than 36.5 million shares outstanding. As such, the dividend would have been about $0.07 per share. That said, the company has been issuing shares so frequently these days, it's hard to keep track of how many it has outstanding right now.
The problems with this payout
In DryShip's view, this dividend is a watershed moment for the company because "it is a testament to the dramatic transformation of the Company's finances over the last 6 months," according to comments by CEO George Economou in the announcement press release. That said, the numbers suggest otherwise.
First of all, the company isn't generating any cash flow to finance a dividend at the moment. Instead, it's still hemorrhaging money. Last quarter, for example, the company reported negative $14.7 million in adjusted EBITDA, which is a proxy for cash flow. That was during a quarter when the spot rates for dry bulk ships reached their high-water mark of the year following the election of Donald Trump. In other words, when shipping rates were their highest point, the company still lost a boatload of money.
That said, the company has taken steps to address this issue by diversifying its fleet away from the volatile dry bulk market. In January, the company signed an option to acquire up to four Very Large Gas Carriers for $334 million. The draw of these ships is that all were already under long-term time charters with a total revenue backlog of $390 million. The company has already exercised an option on one of those vessels, which it expects to take delivery of in June. However, that date is noteworthy because it means cash will continue to flow out of the company on installment payments to the shipyard until this vessel starts generating cash flow this summer.
In another recent move to diversify its fleet, DryShips reentered the oil tanker market, acquiring two ships that should enter service in the second quarter. That said, unlike the gas carriers, DryShips plans to employ these tankers in the spot market, which can be just as volatile as the dry bulk market. For example, leading oil tanker company Nordic American Tankers (NAT -2.08%) noted that last year was a volatile one for the tanker market. Rates for Suezmax tankers, which is Nordic American Tanker's focus, fluctuated from $16,700 per day in the third quarter to $21,600 per day in the fourth quarter, and they were well off 2015's average rate of more than $40,000 per day. Because of those fluctuations, Nordic American Tanker's dividend has gone from $0.43 per share at the start of 2016 down to $0.20 per share last quarter. In other words, DryShips is introducing more volatility to its future cash flow by getting back into the tanker market.
Investor takeaway
Now is simply not the time for DryShips to start paying a dividend. Not only is its core dry bulk business still losing money, but its newest vessels won't even enter service for several months, and not all of those ships will generate steady cash flow. Further, the company clearly has better uses for this money, including buying more ships or repurchasing stock instead of diluting investors into the ground.
