GNK - Genco Shipping: Dividends Likely To Stay Strong Despite Challenging Market

2023-05-31 14:24:48 ET

Summary

• Downward trending market TCE rates are challenging for the bottom line.
• Strong liquidity enables Genco to continue dividend payouts.
• Low valuation makes the risk-reward ratio tempting for income-seeking investors.

Introduction

This is a follow-up article to my previous post about Genco Shipping ( GNK ). In that article, I concluded the company is a strong dividend stock with a credible strategy and strong balance sheet. As Genco's market cap has declined since February 2023, I need to re-evaluate Genco's ability to continue as strong dividend stock. In this article, I write about why the company is able to continue its strong dividend delivery.

Investment Thesis

Genco Shipping's ((GNK)) Q1 remained profitable despite high inflation and a high-interest rate environment. Net income in Q1 2023 was $2.6 million, decreasing from the unusually strong comparison period Q1 2022 when the net income was $41.7 million. Genco's TCE rate in Q1 2023 was $13,947, which is enough for the company to remain profitable on a cash flow basis, as the company has one of the lowest cash flow breakeven rates ($8,384). Genco announced that it had closed a $16,679 TCE rate for 68% of available days in Q2 2023, which indicates the continuation of profitability. Strong liquidity of $260.4 million as of March 31st, 2023, indicates a strong ability to continue dividend payments for shareholders. For dividend-seeking investors, looking for exposure in dry bulk shipping, Genco remains a strong ticker to consider.

Genco In A Nutshell

Genco Shipping is a dry bulk shipping company based in the US. The company owns and operates 44 vessels transporting major (iron ore & coal) and minor (grains, cement, fertilizers, etc.) bulk cargo across global key shipping routes. Major bulk cargoes account for 63% of Genco's overall commodities carried. Iron ore is the largest commodity transported with a 41% share of total cargo carried in 2022. The company was incorporated in 2004 and it went public at NYSE in 2014. Genco has a physical office presence in New York, Copenhagen, and Singapore. Genco Shipping is rated #1 in the Webber Research 2021 ESG scorecard.

Market Overview

The overall dry-bulk market has seen decline trend in freight rates since mid-2022. Increased interest rates and uncertainty in the overall economy have created headwinds also to the dry bulk market. However, China's reverse in Covid-policies will likely increase trade to and from China, supporting the dry bulk market demand. Also, according to Genco's corporate presentation , India's continued growth trajectory and recovery of the Brazilian iron ore exports will support demand for the dry bulk shipping cargoes.

From a long-term perspective, one of the largest upside factors for the dry-bulk shipping market is the low new building order book. New building orders are only 6.9% of the total dry-bulk fleet. When old vessels are scrapped and new vessels do not cover lost supply, cargo prices will trend higher.

Why Genco Can Continue Its Dividend Policy?

Genco has been paying consecutive quarterly dividends since Q3 2019, this indicates a strong commitment to sharing profits with shareholders. There are three main reasons why I believe Genco can continue its strong dividend payout policy. Firstly: strong liquidity, secondly: low outstanding debt, and thirdly: strong TCE-rate closed for Q2 2023.

Strong liquidity is needed for any company that wants to pay dividends to its shareholder. As of 31st of March 2023, Genco's total liquidity was $260.4 million. The total liquidity contains $50.4 million cash and $210.0 million revolver availability. Over the last 4 quarters, Genco has paid on average $27.3 million in dividends per quarter. Taking this into account, Genco's current liquidity supports similar dividend payments in the future.

Low outstanding debt is a critical dividend driver for Genco. According to Genco's company presentation , the company's net loan-to-value was 11% as of May 3rd, 2023. If we calculate loan-to-value purely from balance sheet figures as of 31st of March 2023, we get a loan-to-value of 14%, which is still low. The net loan-to-value presented by the company is lower because they calculate the figure with the fleet's current market value. With both calculation methods, loan-to-value is low. The company's total outstanding debt as of 31st of March 2023 was $162.3 million, which is lower than total liquidity. This means that the company does not carry a significant risk related to inflated interest costs on a level that would compromise Genco's ability to pay dividends.

Genco announced it's closed 68% of Q2 available days with a TCE rate of $16,679. This is higher than the realized TCE rate of $13,947 in Q1. In the short term, this enhances Genco's ability to continue dividend payments. When taking into account the company's transparent dividend calculation framework (see below), the dividend has more upward than downward pressure.

Valuation

Genco Shipping's share price has been decreasing from a high of $19.66 per share in February 2023 to $13.36 per share as of the 23rd of May. Seeking Alpha's Quant Rating gives Hold recommendation for Genco's stock. Valuation is A+ with a relatively low P/E ratio (price-to-earnings) of 4.86. This is 70% lower than the sector average, which indicates discounted value in comparison to Genco's peers. The P/B ratio (price-to-book) is only 0.61, which means the company's market value is only 61% of its total assets. Low price-to-book value means that it is cheaper for an investor to buy Genco's stock from the public marketplace, rather than purchase the vessel directly and begin operating as a cargo operator. Overall Genco's valuation is low on a traditional valuation ratio basis. However, investing in Genco does not come risk-free and the stock may continue to decline.

Risks

Genco Shipping is not a risk-free stock, I'll highlight three risks related to the company: recession, inflation, and stock market downturn.

Economic downturn or outright recession poses a downside risk for Genco's business. If the demand for dry-bulk goods shipping decreases, TCE rates are under downward pressure. If rates decline, Genco may not be able to operate profitably, which could disrupt the company's dividend program.

High inflation increases operational costs for Genco. Higher operating expenses turn to a decline in profits, if revenue does not increase in the meanwhile. If inflation persists and the global GDP growth rate stays low ( stagflation ), Genco may not be able to operate profitably.

Genco's stock price may decline due to a major stock market sell-off. In the short term, this could lead to a decrease in Genco's market value. If the market values decline and the economy does not perform, Genco's investors may face significant losses.

Conclusion

In conclusion, Genco Shipping is an interesting stock for income investors. The company has a reasonable valuation and in the meanwhile, it has shown a strong operational ability and profitability. A transparent quarterly dividend payout policy improves investors' confidence in the continuation of dividend payouts. However, investors must take into account risks related to Genco Shipping and the overall dry bulk shipping industry.

For further details see: