DSX - Diana Shipping: Dividend Yield Continues To Shine Making It A Solid Income Play

2023-06-13 08:14:52 ET

Summary

• Diana Shipping offers a compelling investment opportunity due to its strong balance sheet, attractive valuation metrics, and consistent dividend payments.
• The company has secured two new time charter contracts for its Panamax dry bulk vessels, expected to generate significant revenue, and has refinanced its existing debt, improving its financial position.
• Investors should be aware of inherent risks in the shipping industry, including fluctuating commodity prices and changes in global politics.
• The company's modern fleet and focus on long-term contracts position it well for future growth.

Investment Thesis

Diana Shipping Inc. (DSX) has experienced a tumultuous year in terms of stock value, declining by approximately 26% as compared to its value at this time last year to a current price of $3.78. However, Diana Shipping Inc. has been consistently profitable, with a solid track record of generating revenues through its time charter contracts.

Diana Shipping Inc. has caught the attention of many investors and in my view, the selling point for this company's stock is due to its attractive dividend yield, whose 4-year average came in at 5.32% which is significantly higher than its sector median. The company's dividend payments have been consistent over the years, reflecting its commitment to returning value to shareholders.

DSX's robust financials are evident from its recent earnings report, which showcased a significant increase in revenues driven by rising dry bulk freight rates, an increase in the number of vessels on time charters, and a decrease in the number of vessels laid up and these factors combined will prove to be fruitful for the company in the short and long run.

Additionally, the company has secured two new time charter contracts for two of its Panamax dry bulk vessels, expected to generate around $16.7 million in gross revenue.

While the dry bulk industry is subject to volatility and fluctuations in commodity prices, DSX's focus on long-term contracts and modern fleet puts them in a strong position to weather these storms. I rate DSX stock as a buy for investors looking for exposure to the dry bulk shipping industry and seeking an income stock with strong growth potential and a commitment to returning value to shareholders with a consistent dividend payout.

Overview

Diana Shipping Inc. was founded in 1999 and is headquartered in Athens, Greece. Its operations span the globe, with a focus on major trade routes such as the Atlantic, Pacific, and Indian Oceans.

Their business model is to own and operate dry bulk vessels and charter them out to third-party customers. The company's primary source of revenue is from charter hire payments.

Diana Shipping Inc. specializes in the ownership and bareboat charter-in, A bareboat charter or demise charter is an arrangement for the chartering or hiring of a ship or boat, whereby no crew or provisions are included as part of the agreement; instead, the people who rent the vessel from the owner are responsible for taking care of such things of dry bulk vessels, and has been a leading player in the industry since its establishment in 2005.

As of May 11, 2023, the company boasts a modern fleet of 42 dry bulk vessels, comprising 4 Newcastlemax, 10 Capesize, 5 Post-Panamax, 6 Kamsarmax, 7 Panamax, and 10 Ultramax vessels. The combined carrying capacity of the fleet stands at approximately 4.7 million deadweight tonnages (dwt), with a weighted average age of 9.98 years. The company's modern fleet and diverse vessel sizes allow it to cater to a wide range of customers and cargo types while maintaining operational efficiency and profitability.

Finances

Freight rates and their effect on revenues:

Diana Shipping Inc had r evenue of $290 million in 2022 , up from $214 million in 2021. The company's net income was $119 million in 2022, compared to $57 million in 2021.

I believe that their revenues increased due to several factors, Firstly, the dry bulk freight rates have been steadily increasing, which has boosted the company's income. Additionally, the company has increased the number of vessels on time charters, which has ensured a steady stream of revenue for the company. Finally, the decrease in the number of vessels laid up has also contributed to the company's revenue growth. These factors combined have resulted in a significant increase in the company's revenue, which bodes well for the future of Diana Shipping Inc.

In February 2023, the dry bulk industry experienced a sudden drop in freight rates due to the strict lockdown measures imposed by China to contain a COVID-19 outbreak. As China is a major player in the dry bulk industry, this had a significant impact on the market. The lockdown measures led to decreased demand for goods and commodities, causing freight rates to plummet but have since instantly recovered to expected levels.

Diana Shipping Inc. has reportedly secured contracted revenues of US$162.2 million for 68% of its remaining ownership days in 2023. Additionally, the company has secured contracted revenues of US$39.5 million for 14% of its ownership days in 2024. This indicates that a significant portion of the company's fleet has already been chartered, providing visibility on future revenue streams for the company.

Newly Contracted Vessels

Diana Shipping Inc. has made a strategic move by entering into two new time charter contracts with Smart Gain Shipping Ltd. and Aquavita International S.A. This decision is expected to generate significant revenue of around $16.7 million for the company, which is a positive development for its financial health. These contracts are for two of its Panamax dry bulk vessels, namely the m/v(merchant vessel) Santa Barbara(The charter of the 179,426 dwt ship has already started at $21,250 per day to Smart Gain Shipping Ltd.) and the m/v Phaidra( 87,146 dwt post-Panamax has been fixed to Aquavita International at $12,250 per day) and are for a duration of 12 to 13 months.

My opinion is that this indicates that Diana Shipping Inc. has a strong presence in the shipping industry, as evidenced by its ability to secure such lucrative contracts. Such smart business decisions bode well for the company's future growth and financial stability.

Dividends

Diana Shipping has a history of paying dividends to its shareholders. In 2022, the company paid a quarterly dividend of $0.15 per share. This represents a dividend yield of 10.6%. Diana Shipping has increased its dividend payments for the past five consecutive years.

The company's dividend payments are supported by its strong cash flow generation. In 2022, the company generated $214.2 million in cash flow from operations. This represents a free cash flow margin of 44.2%.

Diana Shipping is a great income play for income investors. The company has a strong track record of paying dividends, and its dividend payments are supported by its strong cash flow generation. I rate the DSX stock as a buy for income investors.

Diana Shipping has a history of paying consistent dividends to its shareholders, with a 4-year average dividend yield of 5.29% which makes it a very good income play. The company has a dividend payout ratio of 60%, indicating that it has room to increase its dividend payments if its financial position remains stable.

Debt Refinancing

The company has also faced criticism for its high debt levels i.e. $531 million and lack of free cash flow i.e. $123 million, to tackle this Diana Shipping Inc. recently announced that it has signed a term loan facility with Danish Ship Finance for up to US$100 million , which will mature in April 2028. On the same day, the company concluded the drawdown of the full amount of the loan, which is secured by nine of its vessels.

The loan proceeds were mainly used to refinance other loan facilities, which had an aggregate outstanding amount of approximately US$87 million, including two loan facilities with BNP Paribas of $75.2 million, which had maturity dates in July 2023 and May 2024, and another loan facility with DNB Bank ASA of $11.2 million with a maturity date in March 2024, related to nine vessels.

I believe that by securing the new loan facility, Diana Shipping has not only refinanced its existing debt but also improved its financial position by extending the maturity of the loan facility. Furthermore, the remaining proceeds from the loan may be utilized to pay transaction costs and expenses incurred in connection with the loan agreement, as well as for general corporate purposes.

Valuation

In the case of Diana Shipping Inc., its current forward P/E ratio of 4.92 is significantly lower than the industry average of 18.6, while the current P/B ratio of DSX is 0.71, which is significantly lower than the industry average of 2.54. This shows me that the stock is undervalued relative to its peers in the dry bulk shipping industry. Investors may view this as an opportunity to buy shares of DSX at a discounted price, as the stock may have more upside potential than its peers in terms of future earnings growth.

Additionally, DSX's high dividend yield and consistent dividend payments indicate that the company is committed to returning value to its shareholders. Therefore, I believe that DSX presents a potential investment opportunity for investors looking for a value stock with a strong dividend track record.

Risks

Diana Shipping's profitability is closely tied to the rates it can command for transporting dry bulk goods. Fluctuations in global trade, supply-demand dynamics, and vessel oversupply can lead to volatility in rates, impacting the company's earnings.

As a shipping company, Diana Shipping needs to invest significant capital in acquiring and maintaining its fleet of vessels. This exposes the company to risks related to vessel acquisition costs, operating expenses, and dry-docking costs.

Diana Shipping relies on charterers for revenue generation. Any failure by charterers to fulfill their contractual obligations, including payment defaults or breaches, could impact the company's cash flow and financial performance.

The dry bulk shipping industry is highly competitive, with numerous companies vying for market share. An oversupply of vessels can put downward pressure on freight rates, affecting Diana Shipping's revenue potential.

Despite the risks associated with an investment in Diana Shipping Inc., I believe it is still a worthwhile investment, especially for income investors as I believe that the potential rewards outweigh the risks associated with investing in the company.

Conclusion

In my opinion, DSX stock is a buy as it presents a compelling investment opportunity for those seeking a solid dividend income and potential capital appreciation. With a strong balance sheet and attractive valuation metrics, the company is well-positioned to weather any near-term market uncertainties and capitalize on long-term industry tailwinds.

Furthermore, Diana Shipping has a solid track record of paying consistent dividends, which makes it an attractive stock for income-oriented investors. As of the time of writing, the company offers a dividend yield of 5.32%, which is higher than the industry average and indicates the company's commitment to rewarding its shareholders.

However, it is important to keep in mind that investing in the shipping industry comes with inherent risks, including fluctuating commodity prices, and changes in global politics.

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