How Safe is This Shipper's Massive Dividend?

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The shipping industry has been depressed for more than four years, causing investor sentiment to deteriorate. Despite early market indicators of an improvement in the dry bulk sector, 2013 is going to be another tough year for ship owners. Against this backdrop, Greek-owned shipping companies managed to remain at the forefront of the industry by controlling over 15% of the world's fleet. Most importantly, the oversupply of vessels and the consequent decline in net voyage revenues did not stop Greek shippers from paying some juicy dividends.

Over the past five years, Navios Maritime Partners L.P. (NYSE: NMM), a leader in the seaborne transportation of dry bulk cargo, rewarded its faithful shareholders with an average dividend yield of more than 9%. But how safe are Navios Partners' dividends?

Dividend profile

Navios has an admirable history of lavish dividend payments. It ranks among the five highest dividend-yielding stocks in the shipping industry. Despite the overall tough market conditions, the company managed to sustain a consistent dividend growth policy.


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NMM Dividend data by YCharts

While the quarterly dividend stood at $0.35 in 2008, the company's latest quarterly cash distribution of $0.4425 per common unit indicated a yield of about 12%. For 2012, the annual dividend was $1.77 per share. Navios Partners' historical payout ratio based on earnings looks ominously high. But its relatively healthy payout ratio based on cash flows -- a more accurate measure of Navios's performance, given the company's accounting strategy -- suggests that its cash distributions are safe.  

Financial and operating performance

Navios's latest business moves all bode well for the continued health of its dividend.

Recently, Navios announced the public offering of 4.25 million common units. It intends to use the net proceeds primarily to fund its fleet expansion. Throughout 2012, the company acquired three new vessels, which contributed to increased time charter revenues. Hence, the firm achieved strong financial performance. For the last three months of 2012, Navios Partners exceeded analysts' estimates on revenues and crushed expectations on earnings per share.

For the full-year of 2012, net income marked a 12% year-over-year acceleration, even after excluding a positive accounting effect from the restructuring of credit default insurance. Net cash provided by operating activities followed an upward trend, while the reserve for estimated capital expenditures remained flat. Thus, the company had enough available cash to provide funds for distributions. Throughout 2012, it generated a non-GAAP operating surplus (a measurement used to evaluate a partnership's ability to make quarterly dividend payments) of nearly $149 million, up by around 30% on a year-over-year basis. It paid $106 million in dividends.

Moreover, Navios Partners essentially improved its fleet employment profile. At the end of 2012, fleet utilization was stronger than in 2011. In addition, considering the depressed levels of spot charter rates, the year-over-year drop in time charter equivalents (daily earnings generated by vessels on charter contracts) was relatively small. This way, the firm avoided risky cash bleedings associated with the gloomy demand environment. 

Looking forward into the future, Navios Partners has contracted out almost 88% of its available days for 2013, as well as almost 50% for 2014, and 40% for 2015. This translates into a revenue stream of around $174 million for the remainder of 2013. For the next two years, the fleet's average contractual daily rate is substantially higher than the current rate. Therefore, the firm anticipates a steady rise in cash inflows, which will allow it to sustain its dividend policy.

What about the rest?

Navios Partners competes directly with DryShips (NASDAQ: DRYS) and Diana Shipping (NYSE: DSX). Neither of these two companies pays dividends.

DryShips, once a pioneer in the space, has failed to enhance shareholders' value. Over the past five years, it underperformed the market and most of its peers by losing over 90% of its value. At the moment, the stock is trading around 47% below its 52-week range of $3.18. Despite its attractive valuation metrics, investor sentiment is negative about its future prospects mainly because of its large debt pile. DryShips is one of the most heavily indebted companies within the industry. However, it has been steadily diversifying its cash flow stream through its 65% ownership stake in the offshore driller Ocean Rig. In the medium term, DryShips could benefit from the sound demand trends in the offshore drilling business.

On the other hand, Diana Shipping has one of the strongest balance sheets in the space. Its current ratio stands at 8.09, and its debt-to-equity ratio is way below the industry's average same variable. The company's solid cash position has prompted an aggressive growth policy. Diana Shipping is taking advantage of the bottom-low levels of new buildings' prices aiming to achieve enhanced returns from an industry rebound.

Diana is possibly Navios Partners' strongest rival. Both companies perform similar growth strategies and hold a solid position within the market. However, fundamentally, Navios Partners is ahead of its peers, with margins that emphasize its effective management and prospects for profitability.

Bottom line

To sustain dividend growth, a company needs healthy cash flows. The recessive economic conditions and the resulting slump in global demand have negatively impacted shippers' earnings. However, Navios Maritime Partners managed to survive four consequent years of market turbulence. At the same time, it remained focused on rewarding its longtime shareholders with juicy dividends. Overall, I strongly believe that the firm is well-positioned to benefit from an industry recovery. Once supply and demand trends start to move toward equilibrium, I think Navios Maritime can emerge as a winner.

FaniKel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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