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Does Diana Shipping See Trouble Ahead?

Source:  Diana Shipping.

I'm sitting here scratching my head trying to figure it out. Did some change in the industry suddenly spook Diana Shipping (NYSE: DSX  ) ? In its earnings release and conference call on May 14, the company seemed confident about the outlook for the dry shipping industry for the next 18 months and then over the very long term. Just nine short days later, that outlook seemed to have changed.

Share repurchase plan
Those who follow my articles know that I'm a huge fan of share repurchases. Nothing screams confidence louder than a company using its precious resources to buy back its own stock. So you think I would have been excited by Diana Shipping's May 23 announcement that the board of directors had authorized a share repurchase plan for up to $100 million in stock.

I'm not. I'm confused. Diana Shipping executives have said time and time again that they would not return any capital to shareholders for the foreseeable future. The plan has always been for the company to keep investing in itself unless the industry is about to turn sour.  

The November call
In the earnings conference call near the end of 2013, Diana Shipping President Anastasios C. Margaronis said the company would return to dividends when "dry bulk shipping moves to the upper part of the shipping cycle." In other words, it would return capital to shareholders only when shipping rates have peaked.

CFO Andreas Michalopoulos added that the expected growth of the company would decrease in this part of the shipping cycle: "In other words we still feel that we have better use of the money ourselves by buying vessels, the way we do." Apparently the stance now is that investing in vessels isn't the way to go. Are we at peak shipping rates already? Given the low rates lately in dry shipping, I certainly hope not.

The February call
The February earnings conference call offered more of the same theme about how the company would use its money. This time CEO Simeon Palios was the first to shoot down the idea of a dividend or "decreasing our equity." That's a fancy way of saying stock buyback. He added that such a move wouldn't happen until buying more assets didn't make sense based on a negative outlook for shipping rates.

Executive Vice President Ioannis Zafirakis said something interesting during the call: "There are lot of other secret parts that based on experience will make us think that we have ended at the upper part of the cycle." Secret parts? It sounds like internally generated information that gives Diana Shipping a heads up before the general public. Zafirakis added, "We have proven in the past that we know very well where we stand at the cycle at any moment." That's kind of spooky. Did the cycle outlook suddenly shift south in a "moment"?

The May call
Now here is where it gets really bizarre. Less than two months ago Zafirakis repeated that a dividend would only be considered during a "nongrowth phase for the company." He then became almost defensive: "As we have repeatedly said -- we expect to deploy the capital slowly in the next year and half." Sounds like no dividend or buyback for at least 18 months.

He then added, "We have been very, very clear on that." Yet the company announced a stock buyback just nine days later. Sorry, Zafirakis, but Diana Shipping's stance just went from "very, very clear" to foggy. What gives? Was it pressure from the board of directors? Or did the market suddenly shift negatively based on your "secret parts" information?

I obviously don't have the answer, or the secret parts wouldn't be a secret. Foolish investors should tread cautiously and at the very least be on the lookout for a possible unexpected turn for the worse. Hopefully the company will offer clarification with its next conference call, if not sooner.

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Read/Post Comments (12) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On July 09, 2014, at 6:55 PM, imacg5 wrote:

    DSX management has addressed this point many times over the years, and it is clear from this quote that they do not consider reaching the "upper part of our cycle" as being reaching the peak of rates.

    "Dividend partly is going to be reintroduced when we feel comfortable that we have reached the upper part of our cycle, and we are moving towards the next peak. We think that we are still far away from that point. You understand that the dividend, this reduction is going to happen at the middle of the cycle moving upwards. Now we are at the bottom."

  • Report this Comment On July 09, 2014, at 6:58 PM, imacg5 wrote:

    DSX has announced share buyback programs several times over the years. In 2010 they had a $100 million buyback in place and bought nothing, zero. And in 2011 they announced a $100 million buyback and bought back less than half a million $ worth.

  • Report this Comment On July 09, 2014, at 7:22 PM, imacg5 wrote:

    Diana management has stated many times in both conference calls this year, that they do not share the unbridled optimism that has been expressed by other shipping CEO's about the prospects for dramatic rate improvement in 2014.

    As usual DSX has been more sober. More importantly, over the years, their caution has been proven right.

    When you don't take the "secret parts" quote out of context. They were being asked, over and over, how they would decide to handle asset purchases, a dividend or a share buyback. And they explained what they were looking for.

    "Ioannis Zafirakis

    The signs include stuff like sustainable increasing demand and sustainable less increase in supply. We do not base our thesis on incremental changes but we want to see big changes in fundamentals like lots of scrapping, no ordering of new vessels. We will have to see clearly demand being stronger than the existing supply of vessels and good macroeconomic situation. At the same time we have to make sure that the yards do not have available slots and capacity to change that very quickly by overproducing vessels, and there are lot of other secret parts that based on experience will make us think that we have ended at the upper part of the cycle."

    The "secret parts" are just other data that they find useful. The major data that they mention first is quite obvious.

    What has changed, or at least has become worse, is the continued ordering of more ships from the shipyards. Also, scrapping has not increased despite horrible rates. And while there has been boatloads of iron ore being shipped every month, rates have climbed marginally, and now subsided. And the very high levels of inventory at the ports would mean that the astronomical rise in Cape rates seen last Fall, will not be as dramatic this year.

    The fleet is still greatly oversupplied.

    And DSX knows it.

  • Report this Comment On July 10, 2014, at 9:11 AM, nickeyfriedman wrote:

    @ imacg5,

    Port inventory is only a fraction of what China uses. DSX has been quite bullish on the rate environment except for late 2015 to early 2016 when much of the orders you speak of translate into deliveries.

    DSX was directly asked on the conference call if it would consider a buyback.

    In the last conference call, Keith Mori of Barclays specifically asked, "I mean do you expect to deploy this capital into expanding of the fleet or maybe some other opportunities are out there like share repurchases or dividends over the next 12 months to 18 months?"

    "share purchases"

    To which COO Ioannis Zafirakis shot it down. "As we have repeatedly said...we have been very, very clear on that...And we keep saying that to everyone that we will not change our pace of purchases."

    That's in addition to the claim by the company that it won't "decrease our equity" when referencing either dividends or buybacks, both forms of self-decrease of equity.

    Thank you for the read.

  • Report this Comment On July 10, 2014, at 1:23 PM, imacg5 wrote:

    I'm well aware of how much iron ore China uses, I've been in dry bulk for 7 years, You???

    And I'm aware that they will use more imported ore because some of the domestic mines will nor be able to compete with the low imported price.

    However, the fact that they do not have that extra 40 million tons of room for ore at the ports that they had last year, will mean that miners and speculators will not be able to just ship it, and worry about selling it later. When there is an orderly delivery schedule, to satisfy their needs, you don't get 100 ships waiting in line to unload. And you don't get the spot Cape rates jumping to $42,000 per day, only to drop to $15,000 per day, a few weeks later.

    It's not a's a seasonal rally. And there are plenty of ships around to handle the increase.

    Diana is always asked those same questions, every year, and every conference call. And their plan remains the same. just as the COO said. And most years they announce a buyback despite those plans. Look it up, over the last few years, how many times they've announced buybacks. All the while declaring that they intend to use their money to buy ships. Which they did.

    The point is: They DON'T USE the buyback. They renew it every year, but they sell very few shares.

    Just announcing the buyback does NOT signify a change in policy.

    IF, they were to actually buy back $100 million in shares, THEN you can say they changed their minds.

  • Report this Comment On July 10, 2014, at 2:31 PM, nickeyfriedman wrote:

    @ imacg5,

    Thank you for responding!

    While I respect your experience with dry bulk, it's not a question of experience but a question of simple math. The reported levels at the ports on any given day are a tiny fraction of what China consumes even on a quarterly basis. Just divide the port inventory, which is never zero, by the annual import number.

    Throw in the fact that the ports are never empty and you're talking maybe 2 weeks tops worth of inventory backlog at the ports. It's immaterial.

    I've looked up every conference call and it wasn't until 2014 when Diana Shipping claimed it won't, and I quote, "reduce our equity." Despite the fact that Diana Shipping clearly stated it won't "reduce our equity" the company went ahead and announced an equity-reducing measure. What they did in 2010 is irrelevant to what Diana Shipping announced and the contradictory action it did in 2014.

    Sure, they might not actually buy back shares and just made the announcement. As Fools we tend to assume if management announces the possibility of share buybacks through a buyback authorization then there is the possibility of a share buyback.

    Thanks for commenting. It's always good to hear from you.

  • Report this Comment On July 10, 2014, at 5:47 PM, imacg5 wrote:

    The benefit of experience in this sector is not only accumulating enough information to make an informed opinion, but also to learn, over the years who to listen to. Out of the multitude of sources that I use for info, none of them find the port inventories to be insignificant. In fact many of their reports list the port inventory first. Drewry's, Lloyds, Platou, BRS, Compass...etc.

    Here for example is the most recent Fearnleys report:

    "“The state of our market can be explained by high iron ore inventories in China and inactive iron ore traders,” Fearnley added.

    Iron ore stockpiles at Chinese ports topped 114.8 million tonnes in June, 57 percent higher than last year, the China Iron and Steel Association said in research published this week, even as iron ore imports fell.""

    By all means that is only 27 days of demand, but despite what most have said, it is expected that imports will replace much of the domestic ore, but not ALL. The theory is, that imported iron ore below $100 per ton will kill domestic supply. But, what about when it jumps to over $110 per ton? Which it will do from time to time.

    I'm not sure what you consider a tiny fraction, but total imports were 820 million tons in 2013.

    All end of year reports that I read, stated that last year, the fact that inventories were allowed to fall to 65 million tons last spring had much to do with the spike in cape rates that was seen in the Fall. it was a short rally, and didn't bring much in the form of profits for the US listed companies.

    Again, the status of port inventories affects the financing of more shipments, it affects the speculators, and the miners who may want to ship first, sell later. It is 50 million tons more in inventory than they had last year at this time, and that's not immaterial, according to the best shipbrokers and analysts in the sector.

    But, you feel free to form your own opinion based on your own logic, unencumbered by history, or experience.

    I'll take my time tested list of sources.

    Good luck.

    As for Diana, you can assume that an announced buyback means that it will happen. I prefer to look at their history, and that shows that not to be the case. At least not a buyback that even comes close to a million shares, or dollars. Maybe they just bought enough for stocking stuffers.

    Look at the 2010 share repurchase agreement, and the 2011. I'll assume this is no different.

    Several shipping companies have announced buybacks, and a closer look shows that they are broke.

    Not the case with DSX.

  • Report this Comment On July 10, 2014, at 7:10 PM, nickeyfriedman wrote:

    @ imacg5,

    Thank you for continuing this dialog. I find it very helpful especially from somebody who is obviously as well informed as you are.

    115 million tons in stockpile ahead of the seasonally strong Fall period would you not agree is a small stockpile in the big scheme of things?

    It's about 1.5 months worth on an annual basis, maybe 1 month worth on a second half year basis, and since stockpiles never go to zero there is going to naturally be a certain amount that always "filling the shelves" so to speak.

    As you stated, stockpiles are up 57% over last year. That's only 42 million "excess" tons compared to last year. That's about 2 weeks worth on an annual basis, maybe less on a second half of the year basis, and that's without factoring in the fact that 2014 will have more import than 2013.

    I have read the argument from "the best stockbrokers and analysts" that 50 million or 42 million tons is a lot, but the problem with any industry is there tends to be a lot of groupthink among experts and a more fresh perspective can sometimes recognize the obvious right underneath everybody's noses.

    The obvious is simple -- 50 or 42 million tons sounds like a lot of weight, and I certainly can't lift it, but it is mathematically impossible to claim it is a material difference. Yes, I'm challenging the experts. 50 million is a drop in the bucket of 820 million in demand last year and something well north of 820 million this year -- ironically probably well north of 50 million more than last year or even more than the stockpiles itself that were supposed to be a material problem.

    With that said, I agree that Diana Shipping has built its credibility nicely over the years. I've been studying this industry especially in the last six months and have grown more and more fascinated by the dynamics, metrics, and the individual players.

    Good luck,


  • Report this Comment On July 10, 2014, at 7:49 PM, 45ACPbullseye wrote:

    Nickey, I enjoy your articles, and learning about the arcane world of dry shipping. Best, Bill Stoller

  • Report this Comment On July 11, 2014, at 10:13 AM, OutOfTheOrange wrote:

    I don't think that there is really a big contradiction between what Nickey and imacg5 are saying.

    The iron ore stockpiles at ports are big and there sure is no urge to start restocking. So that definitely explains why Chinese iron ore imports are declining for the last two months and will obviously continue to do so for July and most probably August too.

    But it doesn't affect future prospects that much.

    Firts, there were several reports in last months that the inventories at the mills themselves are unusually low. So probably the combined level is not really excessive and we are just witnessing the normal seasonal lull.

    And the other important thing is: we don't really have to see port inventories come down in order for cape rates to rise, do we? There is a month or (for Brazilian ore) even more between the rates rise and the rise in import volumes, so that should be enough time to run the port inventories down by using them or just relocating them to the mills, once the buyers step in.

  • Report this Comment On July 11, 2014, at 12:01 PM, ricjensen wrote:

    While I have very little experience in long term dry bulk, I do have a question to ask the knowledgeable.

    Isn't port inventory level much less relevant that inventory turnover. Does anyone know what the turnover is?

    The levels could remain constant and the turnover could be 10x or 20x.

    Or am I missing something, Thx.

  • Report this Comment On July 11, 2014, at 12:02 PM, imacg5 wrote:

    "And the other important thing is: we don't really have to see port inventories come down in order for cape rates to rise, do we?"

    No, Port inventories usually come down when deliveries drop. Like last year. That ends up creating a rush to deliver in the Fall, to supply not only the steelmakers, but at the same time replenish stocks. Which is why Cape rates spiked.

    I guess I'm not making myself very clear.

    What I'm trying to say is. That the usual Winter restocking of the ports, and the stocking of the inventories at the mills, is a Fall seasonal occurrence, and that is why we always have a rise in the BCI. If port inventories drop to normal levels next month, look for Capes to be making $5,000 per day. A monstrous rate rally in the 4th quarter isn't going to make that pain go away.

    There are 1,600 Capes presently working. (And ore deliveries are also made by Panas, and Supras, India has mostly shallower ports)

    If, China were to import 83 million tons per month, every month. That would be a hefty increase in imports for the year. And yet rates would not be spiking, because with an orderly delivery schedule, there are plenty of ships to cover that. April of 2014 had 83 million tons delivered to China. Rates briefly reached $26,000 per day. That's 10 million tons more than Sept. 2013, when rates did spike.

    Let me put it this way, then i'll give up. We'll just have to see what happens this Fall.

    During a short time frame, like August 2013 to Dec 2013, those 40 million tons going into inventory, represent 235 Cape shipments. That's on top of the usual shipments made to supply the steelmakers.

    There are 1,600 Capes working. Most are on longer term charters, and COA"S, and many are owned by the miners like VALE, and steelmakers like POSCO. There aren't that many available to hire on spot. So, when you have a surge in activity, and the right ships are not available in the right places, the BCI spikes up. And not all shippers will be in position to capture those rates. A lot of people thought that a spot player like GNK would be rolling in dough in the 4th quarter last year. Obviously that didn't happen.

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Nickey Friedman

Nickey is a select freelancer for the Fool. She writes about food & beverage, dry bulk shipping, and whatever else floats her boat. After selling four successful restaurants, she turned in her knives for a pen and now puts her passion for food, hospitality, and transportation in writing. You can send email to her at

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