The shipping industry is a challenging one for investors. A subtle change in direction from the global economy can send a tsunami of issues, causing shipping rates to sink, which takes shipping stocks down with it. This scenario has certainly been at play over the past year, and as a result DryShips (DRYS) has endured an excruciating amount of volatility.
That said, some of the cargo ship operator's issues are of its own making. Because of that, investors who love DryShips might want to consider checking out other companies that do a better job navigating the troubling seas of the shipping sector. One company worth a closer look is Nordic American Tankers (NAT 0.80%).
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Comparing the fleets
While at its core DryShips is a dry bulk shipper, it has gone to great lengths to diversify its fleet away from that sector in recent months. Not only has it added several gas carriers to its fleet, but it bought a few oil tankers, too. That makes it a competitor to Nordic American Tankers, which also operates oil tankers.
One factor worth noting is the type of tankers these two operate. DryShips has purchased four tankers this year, including one very large crude carrier (VLCC), two Aframax tankers, and one Suezmax tanker. Contrast that diversification across vessel classes with Nordic American Tankers' focused fleet that currently consists of 33 Suezmax tankers. By operating just one vessel type, the company can drive down costs.
The proof is in Nordic American Tankers' cash breakeven rate on its fleet of Suezmax ships. It was $11,500 per day recently -- quite a bit lower than that of rival Frontline (FRO 1.01%), which operates one of the largest tanker fleets in the world, owning VLCCs, Suezmax, and several other vessel classes. While that diversification isn't necessarily a bad thing, Frontline's cash breakeven on its Suezmax vessels is $17,300 per day. By having a much-lower breakeven level, Nordic American Tankers has a distinct competitive advantage over rivals because it can still make money on its vessels at much-lower shipping rates.
A dividend that rises with cash flow and not stock splits
Another vast difference between Dryships and Nordic American Tankers has to do with how these companies allocate capital between shareholder returns and growth. DryShips earlier this year initiated a dividend of $2.5 million on a quarterly basis -- despite the fact it was hemorrhaging cash -- with that money spread across the number of shares it had outstanding at the record date. As a result of that policy, the dividend on a per-share basis fluctuates along with the share count, which has been on a steady rise because the company has issued a boatload of equity this year that it has covered up with reverse splits. The reverse splits actually make it appear that the dividend is rising, when in fact the company is paying out a fraction of what it used to on a per-share basis due to all the dilution. Furthermore, given that the company doesn't generate enough cash to pay for the dividend, let alone its ambitious fleet rebuild, it's destroying value instead of creating it for investors.
By contrast, Nordic American Tankers typically pays out 70% of its cash flow in dividends each quarter, retaining the other 30% to finance vessel acquisitions. While cash flow volatility causes its dividend to ebb and flow from quarter to quarter, the policy is designed to return value to investors on a quarterly basis while retaining some capital to finance fleet expansion. In this way, the company avoids costly equity issuances. That focus on using internally generated cash flow stands in stark contrast with DryShips' approach: funding both acquisitions and the dividend with new shares no matter the stock's price. That disregard for its equity value is the primary reason its stock plunged a nauseating 99% this year.
Investor takeaway
While DryShips and Nordic American Tankers both operate tanker ships, these companies couldn't be more different. Nordic American Tankers' focus is on squeezing as much value out of its fleet so it can pay investors a compelling dividend that grows with cash flow even as the company prudently expands its fleet. Meanwhile, DryShips' only focus is on expanding its fleet at any cost, which is leading the company to issue a dizzying amount of equity that's obliterating shareholder value. That's why investors who love Dryships' potential upside should check out Nordic American Tankers -- it has a proven plan to create value for its investors over the long term.
