My first thought when I read that Ship Finance International SFL had cut their dividend in half was extreme anger at management. The thinking in this case seems to be: The stock market does not seem to be valuing our stock as they should in light of our excellent dividend, so we will cut the payout and conserve the cash until better days. Unfortunately, the market takes a payout cut as a sign of impending financial collapse and punishes the stock price further.
Underlying the complicated way SFL accounts for their various kinds of leases are several items the bode well for the future. Although the company has a large debt load, they structure their deals with conservative debt to equity, accretive cash flow and long term commitments. From my research, the company also projects themselves from the risk of default by their customers.
The main number I have kept an eye on through the quarters is the per share EBITDA cash flow SFL illustrates for each conference call. This number has been very steady with steady growth until the most recent quarter. The addition of the semi-submersible drilling rigs that were bought and leased last year added 65ยข per share, bring the cash flow for the quarter to $2.22 compared to $1.59 in the 3rd quarter of 2008. These numbers do not include the profit sharing that is kicked in by Frontline FRO each quarter.
Bottom line, I do not see any changes in Ship Finances conservative management and steadily growing cash flow stream. I think the drastic cut in the dividend has further hurt the share price, but that may be a long term benefit to the shareholder who elect to take this quarters distribution in additional stock. In the current environment any company with large amounts of debt is automatically assumed to be in big trouble and the stock continues to sell off yet I believe and hope this is not the case for SFL and that their claimed conservative practices do actually work and allow the company to thrive.
Note: I own a personal position in SFL and will be taking the dividend in cash.
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3 Comments
Hey, that look very interesting!
I believe Mr. Market has got this one incredibly wrong. In my opinion, the stock dropped dramatically this week due to a large seller as the volume was 1.5 to 3x what it normally is over the last several months. Whether that was due to the drop in the dividend, or just a distressed seller, I do not know.
The fact remains the company generates plenty of cash flow to service their debt, continue distributions, and make further accretive transactions. I believe they have the ABILITY TO PAY THE DIVIDEND, BUT CHOOSE TO BE CONSERVATIVE. That said, I do hope want to see the following:
1) Management does not issue any of the 7 million new shares into the market. At this price, it is costly and not well timed.
2) Eliminate the practice of giving shareholders the option to collect dividends in cash. The further the stock price falls, the more costly it is to remaining shareholders.
3) Would like to see some sort of additional transaction. That would servce several purposes: a) accretive to cash flows; b) proove to the market the company will be opportunistic; c) signal they are comfortable with their debt position
4) Would like to see a share repurchase program at these price levels. I think the IRR’s on repurchasing company stock are higher than anything they are seeing in the marketplace.
5) No more decreasing the dividend. Sends the wrong signal to the marketplace. Would prefer an inncrease the dividend. Maybe not to 60 cents, but 40-45 cents. Even at this level, they would retain extra cash to cushion the balance sheet and save for opportunistic deals.
Bottom line, the drop in the share price was extremely disappointing this week because it was unexplainable, except the rise in volume. I think this corrects itself in the next several months. I might take another quarter and dividend announcement for shareholders to appreciate the stability of the cash flows and the company’s ability to pay and/or increase the dividend.
Sorry, point 2 should read: Eliminate the practive of giving shareholders the option to collect dividends in STOCK.