Nordic American Tankers: Dividend Dynamo or Blowup?

Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's examine how Nordic American Tankers (NYSE: NAT  ) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

Nordic American Tankers yields 6.5%, substantially higher than the S&P's 1.9%.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.

Nordic American Tankers doesn't have a payout ratio because it didn't generate earnings over the past 12 months. In the past, the company's payout ratio has generally exceeded 100% by a substantial margin, as the company's dividend policy is to pay out dividends "substantially equal to ... net operating cash flow."

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than 5 is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

Nordic American Tankers has a debt-to-equity ratio of 9%. (It doesn't have an interest coverage ratio because it didn't generate operating income over the past 12 months).

4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

Let's examine how Nordic American Tankers stacks up next to its peers:

Company

5-Year Earnings-per-Share Growth

5-Year Dividend Growth

Nordic American Tankers

N/A*

(37%)

Frontline (NYSE: FRO  )

(30%)

(25%)

Ship Finance International (NYSE: SFL  )

(9%)

(10%)

Teekay Tankers (NYSE: TNK  )

0%

0%

Source: Capital IQ, a division of Standard & Poor's. *Negative earnings.

Like many of its peers, Nordic American Tankers has struggled to maintain its earnings and dividend during the economic downturn.

The Foolish bottom line
Nordic American Tankers has a fairly aggressive dividend policy that will often result in abnormally high payout ratios. The company can largely account for it by issuing new shares, but dividend investors should be aware that dilution is the trade-off.

To stay up-to-speed on the top news and analysis on Nordic American Tankers, or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

Ilan Moscovitz doesn't own shares of any companies mentioned. You can follow him on Twitter @TMFDada. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 12, 2011, at 11:40 AM, psl8er wrote:

    NAT owns all Suezmax tankers and has no charter contracts but trades them in the spot markets. This type of crude tanker has been hit the worst as can be seen from TK's results. With a weak VLCC market as well the larger ships drop down in the smaller ship markets and eat their lunch. NAT's ships are mostly new and expensive so it is losing cash every day on all of them. To maintain its dividend it will need to either raise debt or issue more equity. Either way the out look is bleak and it may simply run out of cash.

  • Report this Comment On August 12, 2011, at 6:33 PM, FilmoTheKlown wrote:

    Yet another article on The Fool that seems to have been generated by an algorithm rather than analysis or knowledge of the shipping industry.

    Shipping stock's dividends are based on free cash flow, not earning. NAT and most other shippers pay high amounts of free cash flow by DESIGN. That's the point, not a 'warning'

    Second, dividend growth is not the same for shipping as for other companies or industries like say DUK or MO or MCD. Dividend is purely a result of shipping rates being higher than operational costs. A casual glance at shipping rates over time would have informed even the most junior analyst of this dynamic. The dividend fluctuates over time based on free cash flow, there will NEVER be a consistent dividend payment with these type of companies. It goes up when shipping rates are strong and falls when they are weak.

    The warning sign for NAT is not its earnings or dividend growth rate but that it paid out more in dividends than free cashflow.

  • Report this Comment On August 13, 2011, at 2:15 AM, rustyrope wrote:

    Thank you for an informative article. I am happy that I have a position in FRO and intend to avoid NAT for the time being. gw

  • Report this Comment On August 16, 2011, at 8:05 AM, rw1270 wrote:

    Again the same nonsense. NAT pays dividend from its free cash flow, not new shares. Free cash flow is earnings plus whatever company writes for depreciation/amortization, which is actual money in the pocket, but expensing large previous purchases. NAT uses new shares to buy ships. Ships are then expensed over long periods (many years), hence big drop from FCF to earnings. Why is that so hard to understand?

    Only in couple of last quarters they borrowed a few cents a share to increase the dividend, which in itself is not a good thing, but their debt level is still very low.

    Dividend of NAT is directly related to spot rates in tanker shipping. There is no magic - high rates, high dividend, low rates - low dividend, or even none. However, due to their low debt (unlike others), their survival is not in question when low rate environment persists. Currently rates are ultralow and may stay that for a year or two. I'm not bullish on NAT, but THEY DO NOT FUND THEIR DIVIDEND FROM STOCK OFFERINGS!!!!

    Why is Motley allowing that nonsense to be published? Looking at quality of that stuff, I should be a writer (and I don't know much about stocks).

  • Report this Comment On August 22, 2011, at 12:41 PM, MattZN wrote:

    More computer generated nonsense from Motley fool. Sigh. I guess it's time to remove them from Yahoo's news items. Nothing but worthless articles for the last 6 months.

    -Matt

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