Out in the wild, which these days includes Wall Street, it's survival of the fittest.
Thanks to a 52% increase in vessel lease rates and the addition of three new cargo ships over the past year that bolstered operating days by 18%, Diana Shipping (NYSE: DSX) logged a phenomenal third quarter that seems incongruous with the market conditions now plaguing the dry bulk industry at large.
Diana was not alone, as competitors like DryShips (Nasdaq: DRYS) and Eagle Bulk Shipping (Nasdaq: EGLE) also coasted on the strength of higher charter prices that prevailed before the perfect storm. Diana surpassed analyst estimates for both revenue and net income, earning a cozy $57.6 million on just $87.4 million in revenue.
Diana knows full well that the days of 66% net profit margins and seemingly insatiable demand have morphed into a new cycle ... where survival, adaptation, and apparently opportunism have become the guiding priorities of the day. With this in mind, Diana Shipping made the bold decision to suspend its hefty dividend after the next installment of $0.95 per share.
As Diana CEO Simeon Palios explains: "We are now entering a period of low charter rates and vessel prices which creates different opportunities to help us produce maximum returns. A suspension of our dividend will enable us to apply our cash flow to these opportunities when we believe we can create long-term value for shareholders." The strategy makes sense, and I believe other high-yield competitors like Excel Maritime (NYSE: EXM) and Navios Maritime (NYSE: NM) may soon jettison dividends as well. Credit Suisse analyst Gregory Lewis estimates that Diana could comfortably spend $675 million acquiring inexpensive used vessels as weaker competitors run into distress.
The company also iterated a policy of valuing the creditworthiness of charter clients over procuring the very best rates. By dealing with rock-solid clients like BHP Billiton (NYSE: BHP) and Cargill, Diana hopes to avoid contract defaults that could well become part of any coming nightmare for shippers.
While I applaud these shrewd adaptations, the market clearly didn't. Investors pounded Diana's shares for a 21% decline Wednesday, knocking the market capitalization well below even the $971 million book value of the company's fleet. With insiders holding 19% of Diana's shares, I believe the interests of shareholders remain a priority, and I continue to view Diana Shipping as a Foolish favorite to survive the coming storm.
Further Foolishness:
Closed for 15 months – opening 10 days only! Get notified ahead of time as our expert portfolio manager invests $1 MILLION in the best opportunities from across The Motley Fool’s premium investment services. This is the first open since August 2008, by invitation only. Enter email below.
Terms & Conditions
RSS Headlines
Fool UK