Diana is Making Insider's Very Happy

By Nikhil Shamapant - March 20, 2012 | Tickers: TEU, DCIX, DSX | 0 Comments

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Insider Ownership is a key signal of confidence for an investor. The common saying is, there are many reasons for insiders to sell, but only one reason that insiders buy. For Diana Shipping(NYSE: DSX), that insider signal is rather strong at 17.86%. Does this mean we should buy Diana Shipping? After being pummeled in recent history, down 20.7% in the last year and down 52.7% in the last 5 years, Diana is rallying, up 21.93% YTD as it has ridden our recent bull rally. Why?  The rally has been caused by signs of economic recovery. More jobs are being created, signaling an increase in middle class income. This in turn could signal an increase in consumer demand, which may increase demand for transportation of goods. Ultimately, this might help out Diana Shipping...maybe. Its all very speculative for Diana at this point, and there are only a few things that remain clear:

1) Quarterly Revenue Growth(yoy) is still down 20.9%, the same is true for yoy Earnings growth-down 37% (Yahoo Finance)

So if things are improving for Diana, they must be in the future, because there are no immediately apparent improvements in their income statements.

2) Diana is conservatively managed, carrying less debt than the average company in its industry(Debt/Equity of 0.3 vs. industry ratios of 1.39--Fool.com)

If you have to get into the shipping industry, even with reducing revenue and income, and speculative markets, this is probably one of the better ways to join, as Diana's management is trustworthy and conservative. However, if you like Diana's management, there are other ways to play the insider ownership(see below).

3) The industry still kind of stinks. In the next 2-3 years, there is still expected to be a lot more capacity for shipping than demand, and that capacity will keep charter rates low. There's also a huge amount of competition in the industry, making it an industry that just isn't, in my opinion, ripe for picking. 

However, if you're STILL hooked to the industry, I would stick with the insiders. Sure Diana Shipping has insider ownership of 17.86%, but its spinoff, Diana Containerships (NASDAQ: DCIX), has even higher insider holdings, and I believe presents an attractive investment opportunity. Being too small and obscure of a company for Yahoo Finance to keep track of(market cap of only 143M), I had to look for insider holdings myself. It turns out, insiders at Diana Containerships own 10.6% of the stock, and Diana Shipping has retained a 14.4% ownership in DCIX, for a total of 25% insider ownership. 

Diana Containerships has most of the same management, and seems to have many of the same industry based complaints as Diana.From the 10-K, "an over-supply of containership capacity may lead to a further reduction in charter rates, which may limit our ability to operate our vessels profitably." However, if you look closely, Diana Containerships doesn't appear to have that problem. All of its ships have locked in rates for at least the next two years. The opportunity for profit with Diana comes from its dividend. Diana says in its 10-K that it will pay 70% of its cash from operations in dividends. So far, it has been true to its word, and currently it supports a dividend yield of 9.66%, which should be sustainable for at least another two years.

Diana Containerships has been buying new ships lately as well, so I wanted to calculate what the expected dividends will be in the next two years including the arrival of these new ships. All the information is in Diana Containerships' 10-K, and on page 37 of 127 in the 10-K the company spells out the charter rates for all of its ships.

After commissions, Diana Containerships will recieve $156,305 per day in revenue.  I will assume that all ships are fully utilized based on their 99% fleet utilitzation rate last year. Based on this, given that the ships will be working for 365 days(divide operating days by average number of vessels-See pg. 8 of 127 in the 10-K), we can expect revenue of $57,051,325 next year. With the last two quarters yielding 9.7M each in revenue, this makes sense given the fleet will be increasing from 5 ships utilized in those quarters to 9 ships in 2012. Diana Containerships also had a profit margin of 13.4% last year, so we can expect $0.49 EPS, and $7,672,507 in Net Income. It's harder to convert this into Cash from Operations; However, last year Cash from Operations was about 3.5x Net Income. This should remain reasonably similar next year as the major adjustment to Net Income(almost 6M) in order to get Cash from Operations was from Depreciation of Diana Containership's Assets.

So a rough estimate would be $1.365 per share in Cash from operations, and 70% of that gives us an annual dividend of .96(a very rough estimate of the annual dividend).

At $6.21 per share, this would give Diana Containerships at least two years of a secure 15.4% dividend yield. A Possible Bonus? The price might adjust to the dividend yield, giving you some price appreciation as well. All in all, a much better way to jump into the shipping industry. 

Diana Shipping's main motive behind the spinoff seems to have been to raise money and turn a previously unprofitable division into a cash cow for Diana Shipping. Therefore, it is likely that Diana Shipping will retain its ownership in Diana Containerships as a nice way to get some easy cash. A similar spinoff occurred at Paragon Shipping, where Paragon Shipping owns an interest in Box Ships (NYSE: TEU), which currently supports a 14.1% dividend yield and there may be value there. Paragon holds a 21.1% interest in Box Ships. Here's an older article on the matter.

Don't invest without doing you're own research, but I think there is a lot of potential here for Diana as an income play.

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