Up 18%, Diana Containerships Has Never Been Cheaper
Nikhil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In my last blog I wrote about Diana Shipping (NYSE: DSX) and their spinoff, Diana Containerships (NASDAQ: DCIX). I was cautiously optimistic about the value of the stock in a shipping recession...now, however, I'm positively jubilant. Diana Containerships' Q1 Release was more than the best case situation I had predicted in my last blog. In that post, I summarized my bullishness in Diana Containerships stock with these points:
1. Insider Ownership, 2. Consistent Revenue Due to Locked In Rates, 3. High Dividend Yield(then about 9.6%), and 4. An expected dividend increase in the future, all while being below book value.
Well now, after having gone up roughly 20% since my last post, the company posted a monster Q1 Earnings. Reporting net income of 1.9 Million, Diana Containerships increased net income quarter over quarter by 6x due to the increase in its ships. This increase led to an increase in the dividend! In my last post I predicted a $0.96 annual dividend, and management somehow beat that with a $0.25 quarterly dividend declaration to shareholders of record May 17th(that means you have to buy May 15th or earlier to get the dividend). The $1 Annual dividend gives Diana Containerships a dividend yield of 13.55%, which is higher than it was when I blogged last-even after a 20% price increase. Relative to the dividend, Diana Containerships has never been cheaper.
Of course, I'm always a bit skeptical when something like this happens. Management declared a 0.25 quarterly dividend, so what makes me think the dividend is maintainable? Well for one, Diana Containerships' revenue is based on a time charter system, where they charter out their ships to others at consistent rates for a period of time. In Diana Containerships' recent quarterly report (which is available here) they spelled out in great detail the number of ships they have, the rate at which they are being chartered at, and the duration of the charters. While one of their ships' charter (Centaurus) ends around July-October 2012, the rest of their fleet is chartered out till at least February 2013, marking consistent revenues for at least the next 9 months, and even without Centaurus, Diana Containerships should be able to sustain the revenue they had this quarter for the next 3 quarters. Looking farther along, however, it will come down to the management and the rates they are able to capture to see if the dividend will continue. Only two ships, APL Sardonyx and APL Spinel are chartered out into 2014.
After income, the other main threat to dividends is a high debt load, something that many shippers tend to be loaded up with. Diana Containerships recently took on $91.7 Million in long term debt to finance the buying of their ships. However, with an interest coverage ratio of 3.5, Diana Containerships should be more than able to handle their debt load and continue dividends into the future. After 2012, however, shareholders should be watchful as management attempts to lock in new rates for their fleet, something which could create a great deal of risk going forward.
Things are looking up with this recent quarter. Here are the CEO's comments from the earnings release: “The dividend we have just announced represents a substantial increase over the prior level, as the continued growth of our fleet has expanded the Company’s earnings and dividend capacity. However, the current dividend rate does not reflect our full potential yield for the future, since four of our vessels joined the fleet during the 2012 first quarter, three in February and one in March, and therefore did not contribute to revenues and earnings for the full quarter. As we receive the full benefit of the revenue and earnings generated by our additional vessels in subsequent quarters of this year, we would expect our dividend potential to increase. We will continue to deliver on our strategy to build a fleet of quality container vessels with very lucrative time charters and a stable revenue stream."
A consistent 15% dividend for a company selling below book value isn't something you can find anywhere else, so I think you would be well off buying, even at these prices, 20% above my last post. As of the last post, Diana Containerships' price had normalized to a dividend yield slightly below 10%. At a 10% yield with no dividend increase, shares would be at $10 now, representing a 35% increase from current prices and the dividend would still be at 10%.
To conclude, before last quarter I roughed up the numbers and attempted to predict the next dividend. This isn't too difficult of an exercise because Diana Containerships operates on preset charter rates, so revenue is relatively predictable. For this quarter the quarterly statement indicates that they had an average of 7 ships operating, so I believe that next quarter with all 9 ships operating we can expect roughly a $0.28 dividend. I guess we'll see in July. The rate that management gets for Centaurus after its charter expires, a rate we will probably find out about in Q3 2012, will give shareholders a pretty good measuring stick for how the dividend will look like in the future when the current time charters have expired. Just make sure to do your own research if you look into investing in this company, or any company for that matter.
shamapant owns shares of Diana Containerships Inc. - Common Shares. The Motley Fool has no positions in the stocks mentioned above. 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. If you have questions about this post or the Fool’s blog network, click here for information.