Over the past year, dry bulk vessel owner Diana Shipping Inc. (DSX +0.00%) has seen its stock fall around 3%. Meanwhile, shipping peer DryShips Inc.'s (DRYS +0.00%) stock has rocketed higher, more than doubling in price over the span. There are good reasons for that advance, but it doesn't make DryShips the better investment option. Here's why Diana Shipping is the better company if you are interested in the volatile shipping space.
A rough year
It would be difficult to call last year anything less than a disaster for DryShips. Leading up to 2017, DryShips was selling ships to help pay down debt. However, the company started the year on the right foot, having received a financial lifeline from its founder at the end of 2016 that would allow the struggling shipper to begin rebuilding its fleet.
Image source: Getty Images.
Things went downhill from there, as the company went on an aggressive buying spree. It fueled its purchases with equity sales to an unaffiliated third party. That company dumped the shares on the market, resulting in massive shareholder dilution. The shares plunged in response, with management enacting a series of reverse splits to help keep the price from falling to, effectively, zero. Motley Fool contributor Matthew DiLallo did the math and found that the sum total of all of DryShips's reverse splits added up to a stunning 1-for-7,840 reverse split. Yes, DryShips rebuilt its portfolio, but the cost for shareholders was massive, and the company's actions speak volumes about its commitment to investors.
That was then, this is now
With the shipping market picking up again, however, investors have, predictably, forgotten about the past. And when you look at the year-over-year results through the first six months of 2018, you can understand why some might be excited about the improvement at DryShips. In the first half of 2017, the shipper lost $108.25 per share (no, that's not a typo) on a split-adjusted basis. In the first six months of 2018 it made $0.04 a share. Things are clearly looking up! But, more important, the company's 2018 performance suggests that it is past the worst of its troubles.
However, there's one more number to look at. As DiLallo pointed out, DryShips had more than 36 million shares outstanding at the end of 2017, compared to just 100 shares (that's not a typo, either) on a split-adjusted basis the previous year. That figure has subsequently jumped to nearly 100 million shares outstanding as of its most recent report. If you take the time to look a little deeper, there's a clear negative hidden underneath this recovery, and it's directly related to the company's 2017 actions. That's why investors would be better off avoiding DryShips.
DRYS Average Diluted Shares Outstanding (Annual) data by YCharts.
On comparative basis, Diana Shipping is a boring company. Like DryShips, it had to contend with the long downturn in the shipping industry. In fact, last year was its fifth consecutive year of red ink. But there were no share-count acrobatics, with the company's share count rising from 81 million to 96 million shares over the five-year span -- a relatively minor increase, most of which happened in the last year. It struggled through the downturn, as you would expect, but it managed to muddle through in relative stride.
This year, meanwhile, Diana Shipping has seen a notable change in fortune, with earnings through the first six months of 2018 showing huge improvement. For example, while the company lost $0.04 per share through the first six months of the year, that was better than a loss of $0.60 in the same period in 2017. And, more encouraging, the company was break-even in the second quarter, suggesting that performance is starting to turn around. The shipper's focus on short-term charters, meanwhile, means that its results should continue to improve so long as dry bulk rates (which were up 45% year over year in the first half for the company) hold up or increase.
No, Diana isn't back in the black like DryShips, but it looks like it's getting there. More important, it has managed this without the painfully wild ride through which DryShips put its shareholders. That ride, meanwhile, speaks volumes about DryShips' management, which doesn't seem focused enough on protecting shareholders.
Trust is important
The shipping industry tends to be boom or bust, so neither Diana nor DryShips would be a good choice for conservative investors. However, for more aggressive types looking to ride the wave of an industry upturn, Diana appears to be the better pick here. As with DryShips, its performance is starting to turn for the better, but you don't have to question whether or not management is going to do something that might destroy shareholder value -- like massively dilute current shareholders via aggressive stock sales.
