Earlier this week DryShips (DRYS) declared the third dividend since its surprising decision to initiate one earlier this year. Like its previous payouts, the company stated that it would hand $2.5 million out to its investors, though it would determine the per share amount based on the number of shares it had outstanding on the record date in August. It's a unique twist that's born out of necessity since the company's outstanding share count has been anything but static this year.
That's evident by looking at the latest update of the company's key financial information, which when compared to the prior one shows another remarkable surge in the share count. The dilution has gotten so out of hand this year that shareholders tried suing the company to stop it from issuing more shares. However, that attempt failed, which means that more dilution is on the way thanks to an agreement the company has with another investor.
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A jaw-dropping rise
To understand the order of magnitude that the company's dilutive equity sales are having, we only need to go back to June 22 when DryShips updated its key financial information to reflect its latest reverse stock split. At that time the company noted that its shares outstanding had fallen to 5.7 million thanks to the reverse split. Though, it's worth pointing out that this was nearly a million shares more than the company thought it would have out when it announced the details of the split a few days earlier.
Given that quick rise, it's no surprise to see that the number has continued climbing in the weeks that followed. However, what is a bit shocking is to see that DryShips now has more than 26.6 million shares outstanding, according to its latest update. Put another way, the shippers' outstanding shares have rocketed a stunning 370% in less than three weeks. That incidentally puts the count above the 24.1 million shares it had before announcing its latest 1-for-5 reverse split on June 19. Fueling that surge is the company's decision to continue issuing new shares at a breakneck pace as it raises cash to expand its fleet, which has grown by 17 vessels this year.
Selling shares to finance expansion isn't necessarily a poor decision. Rival dry bulk shipper Diana Shipping (DSX -0.34%), for example, recently completed a public offering that raised over $80 million, which it used to buy three more ships. However, that offering only increased Diana Shipping's outstanding share count from 81 million to 106 million, which is about 30% dilution. While that dilution has weighed on Diana Shipping's stock, which has fallen about 30% since completing its offering, the hope is that the incremental earnings from these ships will lead a full recovery, and then some, in future quarters. However, in DryShips' case, it has sold so much stock that its share price has plunged more than 90% over the past month because the market simply cannot absorb all the new stock it's issuing. As a result, it has dug itself a hole that's going to be nearly impossible to climb out of, which is why some investors have tried to stop the company from selling more shares by suing, only to have that motion denied by the courts.
More dilution is on the way
DryShips steady stream of stock sales stems from an agreement it has with Kalani Investment Limited, which in April agreed to buy up to $226.4 million of the company's common stock over the next 24 months. Through early July the company had raised $143.5 million via this offering. That leaves it with another $82.9 million in shares that it can sell to the investor over the next two years. Though, given the rate at which it's selling stock, it's likely complete that offering within a matter of months.
That means even more shares will flood the market. To put the significance of that future impact into perspective, the company could issue another 88.2 million shares -- assuming the current stock price of just under $1 per share held -- which would expand the share count by more than 200%. That said, as it issues those shares, the dilution would likely keep pushing the stock lower, making each subsequent sale all the more dilutive. That plunging stock price would inevitably force the company to enact additional reverse stock splits to prop up the price, which is the cycle the company has repeated several times over the past year.
Investor takeaway
While DryShips' rebuilt fleet holds the promise of a brighter future, the path the company has taken to get there has wrecked the fortunes of investors because it has flooded the market with so much new stock that it has devastated the share price. Unfortunately, the company will likely continue selling shares until it exhausts the remaining capacity on its deal with Kalani. Because of that, DryShips' stock will probably keep sinking.
