Stable dividends in a turbulent market: Opportunities and risks of shipping
Maritime transport of oil is a key segment of the world economy, ensuring the continuous flow of this strategic raw material between continents. A fleet of dedicated tankers such as Suezmax vessels plays a vital role in linking production and consumption areas, thereby contributing to the continuity of international trade. These vessels can carry up to one million barrels of oil and their design allows them to pass through the strategic Suez Canal, optimising shipping routes between Europe, the Middle East and Asia.
One of the attractive factors attracting the attention of investors in this sector is the dividend policy of some companies. The payment of regular dividends is becoming an important indicator of stability and financial health, especially for investors seeking long-term income. However, despite attractive yields, companies can face challenges associated with sustainable dividend payments, which in some cases can risk reducing them if company profits come under pressure. The topic of dividends is therefore a key aspect to watch when assessing the investment potential in the shipping industry.
Company presentation
Nordic American Tankers $NAT+0.6% is a Norwegian company that specializes in the transportation of crude oil and petroleum products by sea. It was founded in 1995, making it one of the longest established companies in this specific shipping sector. Its main product, or service, is the provision of crude oil transportation using large tankers, known as Suezmax tankers, which are capable of carrying up to 1 million barrels of crude oil per ship. These tankers have a specific size to be able to pass through the Suez Canal, which is advantageous in terms of freight transport between Europe, the Middle East and Asia.
The company's focus is on global shipping, but its activities are heavily concentrated in the areas with the greatest demand for oil - particularly Europe, America and Asia. Nordic American Tankers does not own any oil wells or process crude oil. Its main business model is to lease its tankers on short- and long-term contracts to various oil companies and traders who need to transport their products around the world. An important part of its business is to optimize its tanker fleet to meet safety and environmental standards, which are very strict in the shipping industry today.
The company's history is closely linked to the rise and fall of oil demand and the evolution of the price of this commodity on world markets. The company started with a few vessels but gradually expanded its fleet to dozens of tankers. NAT's main focus is on operational efficiency and trying to maximise profits in times of favourable oil prices. The company's ability to react quickly to market conditions, be it increased demand for oil or fluctuations in freight prices, plays an important role in this.
An interesting element that sets Nordic American Tankers apart from many other companies is its approach to dividend policy. The company has long sought to make itself attractive to its shareholders by paying high dividends on a regular basis. This approach makes NAT not only an interesting company from an oil transportation perspective, but also an attractive investment target for those seeking a stable dividend income.
In terms of acquisitions, NAT does not make large mergers and purchases of other companies, as is common with some other companies in the industry. Instead, it focuses on buying and upgrading its own vessels. Nordic American Tankers' fleet consists exclusively of Suezmax tankers, allowing it to focus on this particular market area without diversifying into other types of shipping. This focus on one tanker category gives it a competitive advantage, as Suezmax tankers are highly flexible due to their size and can be used on different routes around the world.
Dividend giant, but there are problems
Nordic American is a dividend giant, having paid a dividend for each of the last 108 quarters. It's a truly phenomenal performance. As a result, the company currently offers a dividend of 11.44%.
However, dividends haven't always increased during this period, and sometimes the dividend payouts have been fairly nominal. This year, Nordic American is set to pay dividends of $0.48 per share, based on the current $0.12 per share for the quarter.
However, the company is projected to earn only $0.43 per share in 2024, suggesting that management is paying out more in dividends than the company is earning. It also points to a forward price-to-earnings ratio of 8.5 times, a 24% discount to the sector.
This payout ratio is a big red flag and suggests that the dividend will have to come down. The caveat is that financial performance is expected to improve significantly in 2025. According to analysts, Nordic will earn $0.64 in 2025 and $0.68 in 2026. With this in mind, it can continue to pay dividends today. But it is risky.
How was the last quarter?
Nordic American Tankers (NAT) recently released its quarterly results, which beat analysts' expectations. The company's earnings were $0.10 per share, beating the Zacks Consensus Estimate, which projected earnings of $0.07 per share. Compared to last year, when earnings came in at $0.13 per share, there was a slight decline, but it was still a positive surprise as the actual results were 42.86% better than expected. It should also be remembered that in the quarter before that, earnings of USD 0.11 per share were expected, but NAT reported only USD 0.07, which was an unpleasant surprise then with a variance of -36.36%.
In terms of revenue, the company reported earnings of $66.1 million for the quarter ended June 2024, which was 21.64% higher than analyst estimates. Although revenue was down slightly from the previous year, reaching $67.8 million last year, it still represents a decent performance given the current market conditions.
As for the shares, they have lost around 14.3% of their value since the beginning of the year, while the S&P 500 index has risen by 17.2%. This relative weakness in NAT shares raises questions in the market as to what will happen next. Investors are wondering whether the situation will improve or whether stocks will continue to lag the broader market.
The future performance of the stock will largely depend on future financial results and earnings expectations, which are revised periodically. Current estimates for the upcoming quarter call for earnings of $0.09 per share and revenue of $66.16 million. For the full year, the consensus expects earnings of $0.41 per share on sales of $264.07 million. However, recent trends in estimate revisions are not very favorable for Nordic American Tankers.
Recent results
Nordic American Tankers' (NAT) long-term financial results show significant fluctuations in performance over the past few years, which are influenced by the specific market conditions in the crude oil shipping industry.
The company's revenues have been subject to significant fluctuations over the years. Revenues reached US$354.6 million in 2020, but then dropped sharply to US$191 million in 2021, reflecting difficult market conditions, likely related to the COVID-19 pandemic, which has reduced global oil demand. However, this negative trend began to improve in 2022, when revenues increased to US$339.3 million. In 2023, the company further increased revenues to US$391.7 million, indicating a market recovery. The latest 12 months (TTM) data suggests a slight decline to US$365.2 million, which may be affected by uncertainty in the energy sector or other global factors.
In terms of cost of sales, these remain relatively stable at USD 255.8 million in 2020, rising significantly to USD 264.3 million in 2021 and even to USD 284.4 million in 2022. However, the company was able to reduce these costs to USD 240.9 million in 2023, and this positive trend continued in the TTM period, where the cost of sales was USD 243.9 million.
Gross profit, which is a key indicator of the company's performance, was relatively high in 2020 (USD 98.8 million), but experienced a dramatic drop the following year when it reached negative numbers (-USD 73.2 million). This negative result likely reflects a combination of declining demand and higher operating costs. In 2022, gross profit recovered to USD 54.97 million, indicating an improvement in operating conditions. The year 2023 brought a significant improvement in gross profit to US$150.8 million, reflecting efficiency gains and a stronger market. The current TTM gross profit figure is US$121.3 million, which marks some slowdown but is still a positive result compared to the crisis year of 2021.
Net profit, which is the final measure of success, also reflects these fluctuations. In 2020, NAT reported a profit of $50 million, but in 2021 there was a huge drop to a loss of $171.3 million, which likely included one-time costs and negative market effects. The following year, 2022, brought a modest recovery to $15.1 million. In 2023, the company significantly increased earnings to $98.7 million, consistent with improved market conditions and more effective cost management. Current TTM profit is $66.9 million, indicating some decline compared to the previous year, but still a healthy result compared to the crisis period.
Key indicators
The valuation of Nordic American Tankers (NAT) relative to the sector average points to several key differences and trends. In terms of valuation metrics, NAT shows mixed results, outperforming the sector average in some areas while lagging in others.
In terms of the indicator P/E (Price-to-Earnings) Non-GAAP over the last 12 months (TTM) NAT has a value of 12.48, which is 18% higher than the sector average of 10.57. This suggests that the market has higher expectations of the company than the industry average. However, the indicator P/E (FWD)which focuses on future earnings, is significantly lower for NAT (8.47) than the sector average (11.63), a difference of 27.2%. This difference suggests that investors may be concerned about the firm's future earnings growth, but at the same time they rate its stock as more attractive in terms of future performance.
Indicator EV/Sales (Enterprise Value to Sales)which compares the value of a company to its sales, is higher for NAT than the sector average. For the last 12 months (TTM), it stands at 2.75, which is 31.25% higher than the sector average of 2.10. This higher ratio may indicate that investors are willing to pay a higher price for a company's earnings, which could reflect expectations of stronger earnings or better margins. However, the outlook (EV/Sales FWD), this ratio increases further to 3.66, a significant increase of 88.16% from the sector average (1.95). This increase may indicate that NAT faces higher operational risks or expected costs compared to its peers.
Indicator EV/EBITDA (Enterprise Value to EBITDA) for NAT over the last 12 months is 6.88, slightly higher than the sector average (6.22) but still relatively low. This means that the company is valued similarly to other companies in the sector. However, when we look at the forward-looking indicator EV/EBITDA (FWD), NAT has a value of 5.66, which is 4.47% lower than the sector average (5.93), which could be a positive signal to potential investors who expect an improvement in the firm's operating efficiency.
Indicator Price-to-Sales (P/S)which compares share price to earnings per share, is higher for NAT than the sector average. Over the last 12 months (TTM), it is 2.08, which is 53.91% higher than the sector average (1.35). Price-to-Book (P/B)which shows that NAT has a current value of 1.44, which is 5.40% lower than the sector average (1.52).
One of the strongest points of NAT is dividend yield. Over the past 12 months, it has been 11.88%, which is 210.78% higher than the sector average (3.82%).
Conclusion
Nordic American Tankers Limited is an international tanker company that owns, operates and charters Suezmax tankers. The company's business model is strong but is currently being challenged by the ongoing geopolitical tensions around the Red Sea. The stock is down more than 12% in the past 11 months yet still has many positive aspects to focus on.
Supply and demand for Nordic American Tankers Limited's fleet is currently favourable, contributing to the positive outlook. In addition, the company has one of the lowest debt levels among publicly traded tanker companies. As of March 31, 2024, the company's net debt - calculated by subtracting current assets from total liabilities - was $228 million. With a fleet of 20 vessels, this translates into debt of $11.4 million per ship. The company also maintains a low debt-to-equity ratio of 0.5.
Nordic American Tankers Limited places great emphasis on maintaining its financial health. The company prioritizes strategic timing and careful financing of expansions to ensure financial stability and maintain its commitment to paying dividends. The company has paid dividends for 107 consecutive quarters, making it one of the best dividend stocks. The company further expects to increase its payout once market conditions improve. Moreover, its financial position is strong, with over $37.5 million of operating cash flow generated in the first quarter of 2024.
However, uncertainty over production and oil prices must be taken into account, which may affect both the company's results and its dividend.
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