China is struggling with Covid-19—again—and that’s bad news for shipping stocks. The drop has created a buying opportunity in
Genco Shipping & Trading.
The pandemic was a boom time for the global shipping industry. Snarled supply chains lengthened shipping times, just as demand for goods spiked, sending rates soaring. Shippers enjoyed record profits and a flood of cash. Management teams had to choose what to do with their new riches: Options included investing in new ships, paying down debt, or sending the windfall to shareholders via dividends and buybacks.
Genco (ticker: GNK) decided to first clean up its balance sheet—net debt at the end of the first quarter stood at $112 million, down two-thirds since the start of 2021—and then debut a new dividend policy that ties payouts to quarterly cash flow. The New York-based company operates 44 dry-bulk ships, which travel the world’s oceans transporting large amounts of commodities, including iron ore, coal, and grains. Genco says that it now has the lowest cash-flow break-even rate among U.S.-listed dry-bulk shippers.
That hasn’t helped Genco stock, which Barron’s recommended buying in May 2022. The shares have dropped about 35% after dividends, versus a flat
Russell 2000,
over the past year.
But that’s a lot better than the 75% decline in the
Breakwave Dry Bulk Shipping
exchange-traded fund (BDRY), which holds dry bulk freight futures. The drop in shipping rates is a result of China’s weaker-than-expected recovery, as well as the business’s inherent seasonality, with less grain to ship during the Northern Hemisphere’s winter. Renewed worries about a Covid-19 flare-up in China have also hampered Genco stock.
Some investors were also disappointed with Genco’s first-quarter dividend, paid in mid-May. It was just 15 cents a share, following five quarters of payments ranging from 50 cents to 79 cents under its new dividend formula of operating cash flow minus capital expenditures, debt repayment, and an additional cash reserve.
That payout should rise later in 2023 to as high as $1.22 a share for the full year, according to Stifel analyst Benjamin Nolan, good for a 9.4% yield—as Chinese demand for commodities grows and grain harvests boost demand.
The longer-term picture is positive from the supply side of the equation: There are relatively few new dry-bulk vessels on order, as shippers deal with a hangover from overordering in the last boom cycle and the uncertainty around the shipping fuel and propulsion systems of a greener future. As a result, shipping rates could rise even without a large increase in demand.
Genco stock will prove its true value through the entirety of a shipping cycle—and the current doldrums present an attractive entry point for investors.
Write to Nicholas Jasinski at [email protected]
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