Wednesday, September 24, 2008

Nordic American Tanker (NAT) Dividend Stock Analysis

Nordic American Tanker Shipping, Ltd. owns and operates crude oil tankers. The company operates its vessels in the spot market, on time charters, or on bareboat charters. As of December 31, 2007, it owned 12 double hull Suezmax tankers averaging approximately 155,000 deadweight tons each. The company was founded in 1995 and is headquartered in Hamilton, Bermuda.
Nordic American Tanker is not a dividend achiever but a component of the NYSE Composite and Zacks Yield Hog index. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 29.10 % to its shareholders. The stock gained 19 % value so far in 2008.

At the same time company has managed to deliver a 6.40% average annual increase in its EPS since 1998.

The average cash breakeven for the trading fleet of 12 vessels is about $9,000 per day per vessel. The company has stated in their 2Q earnings and dividends announcement that when the freight market is above that level, the company will pay a dividend. The good news is that the average daily spot rate for the type of ships NAT holds has not fallen below $20,000 since 2000.

Only one of the twelve vessels is under contract to ship goods at fixed prices; the rest are on the spot market, which explains the great variability in the quarterly and annual financials.

The ROE has fluctuated greatly; rising from 4% in late 1990’s to over 38% in 2004 before falling to 7% at the end of our study period.

Annual dividend payments have increased by an average of 11.90% annually over the past 10 years, which is higher than the growth in EPS. A 12% growth in dividends translates into the dividend payment doubling almost every six years. The problem is that even though the company is committed to paying a large amount of its cash flows to shareholders, it hasn’t committed to paying stable dividend payments. Because of this fact do not be surprised if the annual dividend payments in six years are not double what they were in 2008.
41.2% of the 2007 dividends were distributed from current earnings while 58.8% were a return of capital.

If we invested $100,000 in NAT on December 31, 1998 we would have been able to purchase 8696 shares. In early 1999 your quarterly dividend check would have been for $2939. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $58,000 by August 2008. For a period of 10 years, your quarterly dividend income would have increased by 373%. If you reinvested it though, your quarterly dividend income would have increased by 1873%.

The dividend payout ratio has remained between 90% and 250% since 1998. Once again the reason why the payout is above the EPS is because NAT’s management pays out distributions out of the operating cash flows, which includes certain non cash items such as depreciation expense (which is excluded from the EPS calculation).

Overall the wild fluctuations in dividends and earnings per share are something my method is not accustomed to. The tanker business is very competitive and capacity has been increased faster than demand over the past couple of years. Having the majority of the fleet on the spot market could definitely boost profitability in good years, but could also lead to poor operating performance in bad years.

One positive is that the company has low amounts of long term debt relative to its assets. I also liked the fact that the tangible book value of the stock was at $22.42 at the end of 2007.
One positive is that Nordic American Tanker has never paid a quarterly dividend per share which was lower than 30 cents/share. If I were a holder of NAT I would treat any quarterly payment as if it were only 30 cents and putting the rest in a savings account in order to smooth my dividend income.

I plan on initiating a small position in NAT on dips below 30 or close to the tangible book values.

Disclosure: I do not own shares of NAT

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