DSX - Diana Shipping Q4: Not Exactly A Rocket But I'm In For The Dividend Stability

Summary

• Diana Shipping is a pure play time charterer in the dry bulk industry and, as such, its returns tend to lag behind more spot-oriented players.
• This is both a blessing and a curse, depending on the point in the market cycle. However, the stable dividend for the next three quarters is brilliant.
• From a P/DPS multiple perspective, the company is attractively valued and offers dividend income stability in an industry-increased cyclicality.
• While I expect it to underperform more spot-oriented companies, I will include it in my dry bulk shipping portfolio as an overall risk reducer.

A few days ago Diana Shipping ( DSX ) announced its Q4 2022 earnings in which they reported earnings per share of $0.27 and total revenues of $75.7 million, falling short by 200k. I have written about this company several times in the past , recent being this one and one of the things I really liked was its conservative approach, with its fleet being exclusively chartered out in long time charters, thus, avoiding the increased volatility associated with the spot market. Today, I'm taking another look at the company and outlining its bullish characteristics.

Long time charters: A blessing or a curse?

A few years back, a friend of mine was negotiating a professional lease for his business and was left facing a simple, but yet harsh dilemma: The landlord had offered him an 8 year lease at a specific rent and the option to sign a 12-year lease at a not enormous, but yet significant discount. At the time, the real estate market was heavily depressed and the landlord was looking to secure as much rental stream as possible, even at a slight discount. My friend finally opted for the 12-year lease, and, after 3-4 years, when commercial real estate values popped, he kept on paying a very competitive rent, in relation to the rest of the market.

I'm sure you get the analogy here. Diana Shipping is acting like the landlord of the example I outlined above. While this is a brilliant strategy to follow in times of deteriorating market conditions, it is also certain that it will lead to lower than average returns if applied in an improving market.

According to the company's earnings presentation , they recently signed time charters for 4 Newcastlemaxes / Capesizes at a rate of $17.6k per day, for an average duration of 532 per vessel. The also chartered out 8 Kamsarmaxes / Panamaxes at a rate of $14.3k per day, for an average of 296 days. Finally, they also chartered out 5 Ultramax vessels for an average daily rate of $14k and with an average time charter duration of 284 days per vessel.

As we can see in the table listed above, the average time charter rate for 2-year Capesize time charter contracts was $16k per day, while 1-year Panamax/Kamsarmax and Ultramax time charters are signed for $14.25 and $13k-$14.5k per day, respectively. We can see that Diana's time charters are in line with the current market trends, and, in the case of larger vessels, slightly better.

However, let us not neglect the fact that the Baltic dry index is at a point which was again seen in early 2020, when the COVID-19 pandemic initially occurred. As I'm writing this paragraph, the BCI, is trading at 573 points, having jumped by 47% since yesterday. There's much conviction that the strong and rapid recovery of dry bulk rates will continue during the next three quarters of this year. In order to provide some perspective, I will note that, last September, when the BDI was trading at the very decent point of 2000 points, the average 1-year Capesize time charter was signed for $23k per day. While the company still has some old time charters in quite good rates, these will be phased out almost completely until the end of Q2 2023.

What's to like: A (relatively) stable dividend payer at a good price

To be honest, one thing that surprised me in Diana's recent earnings release was the company's commitment to pay out to its common shareholders at least $0.15 per share in the next three quarters of 2023. If we don't allow for the "in-kind" OceanPal ( OP ) preferred shares special distribution, we have a forward dividend yield of 12.8%. The rate of OceanPal's preferred shares distribution is to be determined. However, using just the minimum of $0.60 per share future dividend payments, we get a P/DPS multiple of 7.8x.

For the purpose of comparison, I will form a peer group, containing companies participating in the dry bulk sector, which will include Star Bulk Carriers ( SBLK ), Eagle Bulk Shipping ( EGLE ) and Safe Bulkers ( SB ). None of these companies are a pure time charter player, and as such, it's impossible to predict future dividends, with a standard degree of conviction. Therefore, I will use TTM dividend payments, and apply subjective discount rates to allow for the slowing market.

Star Bulk Carriers provided its shareholders with total dividend payments of $5.10 per share, on a TTM basis. During the last 365 days, Star Bulk's shares had an average price of $23.44, resulting in a P/DPS multiple of 4.6x. Using the same methodology, the respective figures for EGLE and SB were 7.2x and 37x. For Diana Shipping, the TTM P/DPS multiple was 5.4x.

So, what these numbers tell us, is that, from the perspective of the dividend investor, the best bang-for-buck deal is found in Star Bulk Carriers. However, the P/DPS multiple of Diana Shipping is not bad at all. In fact, if we take into consideration the more fixed nature of its returns, it becomes really interesting.

Bottom Line

Don't expect Diana Shipping to outperform its peers, just as a passive income investor wouldn't outperform a bull market. However, if you want to build a balanced portfolio with exposure to the shipping industry, I would recommend owning this stock to lower the overall risk of returns, while at the same time, having a more than decent income stream secured.

From a technical point of view, the share price just broke out its 200-day moving average, which coincided with a significant Fibo resistance. I expect some degree of accumulation and a bullish movement of the stock.

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