Nordic American Tankers' Dividend X-ray

Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and how that's changed over the past five years.

The company we're looking at today is Nordic American Tankers (NYSE: NAT  ) , which yields 9.8%.

Industry
Nordic American Tankers is a shipping company that focuses on oil tankers. The tanker market had been stabler than other shipping markets, which have greatly hurt some companies such as DryShips (Nasdaq: DRYS  ) , but weakness this year has been hurting all tanker companies. Teekay (NYSE: TK  ) and Overseas Shipping Group (NYSE: OSG  ) have been hurting, while some think Frontline (NYSE: FRO  ) is on the brink of death.

Nordic American Tankers Total Return Price Chart

Nordic American Tankers Total Return Price Chart by YCharts

Dividend
To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years, and, if so, how much has it grown.

Nordic American Tankers Dividend Chart

Nordic American Tankers Dividend Chart by YCharts

Nordic American's dividend has been declining as the tanker shipping market has weakened.

Immediate safety
To understand how safe a dividend is, we use three crucial tools, the first of which is:

  • The interest coverage ratio, or the number of times interest is earned, which is calculated by earnings before interest and taxes, divided by interest expense. The interest coverage ratio measures a company's ability to pay the interest on its debt. A ratio less than 1.5 is questionable; a number less than 1 means the company is not bringing in enough money to cover its interest expenses.

Nordic American Tankers Times Interest Earned (TTM) Chart

Nordic American Tankers Times Interest Earned (TTM) Chart by YCharts

Nordic American doesn't cover its interest expense with operating earnings, which is worrisome. However, because of large depreciation expenses on a cash basis, Nordic American is able to cover its dividend.

Sustainability
The other tools we use to evaluate the safety of a dividend are:

  • The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.
  • The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business's health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.

Source: S&P Capital IQ.

Nordic American's payout ratio has been all over the place.

Another tool for better investing
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Read/Post Comments (3) | Recommend This Article (1)

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 November 29, 2011, at 9:03 AM, rw1270 wrote:

    First Motley Fool article about NAT that understood how NAT pays its dividend. NAT is one of the most misunderstood companies, as its business model and dividend policy is completely different than most of US-traded companies.

    NAT by its open policy pays out full cash flow as dividend and grows the fleet by stock offerings. Most other companies grow by debt or retaining profits - that's why you read those "pay dividend out of stock offerings" nonsense in many places, notably in MF in the past. There may be a limit NAT's approach, as at some point accretive effect from expanding fleet will start diminishing and dilution from shares will increase, but it's not there yet.

    They also never set any fixed dividend amount. They say - we make money, you get it, we don't, you may get nothing. So recently it does not look good, but in boom times the dividend goes gangbusters. That's why it is "all over the place" - it mirrors market. If one can't stomach that, they should buy a utility or consumer staple company.

    Now, NAT is definitely in a bit of trouble lately (cash flow turned negative last quarter), but it's still relavitely healthy vs. its competition. There is some pain ahead, mostly due to shipping rates remaining low due to ship oversupply, but NAT should be first to benefit from any kind of recovery (their balance sheet is best of the bad neighborhood). It might take a while, though. What I don't like now, is management appears to be caving to pressures to pay out something even when there is nothis to pay it from, so they borrowed money this quarter and a little last one. That's generally not very good. Fortunately, debt level is low so far, but it's increasing. If there is no turnaround, not even a small one, they may enter thei'r competitor's debt trap - the very one they boast they are not in.

  • Report this Comment On November 29, 2011, at 3:29 PM, rw1270 wrote:

    Now that I look at the article again, the FCF payout ratio chart can't be correct. FCF is basically earning plus writoffs from depreciation/amortization costs. Since NAT is writing off ships, its payout/FCF can't be higher than payout/EPS, as the graph suggesting was happening between 2007 and 2009. Just impossible. The most likely explanation is the author is using incorrect formula for FCF, probably something to do with incorrect accounting for stock offering inflows and ship buying outflows at that time (I suspect time lag between them was creating wrong impressions). .

  • Report this Comment On November 29, 2011, at 3:41 PM, mm5525 wrote:

    I'm just glad I sold in the mid 30's. Am considering getting back in down here, though. This stock has been thoroughly punished to no end and is still best in breed, especially with the turmoil in the crude shipping sector with other competitors like Frontline.

    HH is a good man, and he goes out of his way to indicate the dividend has been paid quarter after quarter and year after year (perhaps too much), but sometimes I wonder if he would not serve shareholders better if he actually didn't pay a dividend, even if he ends the streak. In the end, oil must be transported.... NAT is the best in class... I think HH has sacrificed "paying a dividend forever" versus fiscal prudence. Spot rates have to improve from here, especially with the turmoil in Iran..

    This stock seems to be a screaming buy down here. It really can't go much lower than this.

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