Overseas Shipholding Group (OSG) is a bulk shipping company engaged in the ocean transportation of crude oil and petroleum products. The Company owns or operates a fleet of 106 vessels (aggregating 10.9 million deadweight tons and 864,800 cubic meters), of which 84 vessels operated in the international market and 22 operated in the United States Flag market. OSG's newbuilding program of owned and chartered-in vessels totaled 23 international and United States Flag vessels, bringing the Company's total operating and newbuild fleet to 129 vessels.
At the current market price of $50.15, OSG is sitting on a 3.49% dividend yield.
Investing in stocks that pay high dividends is an effective way for the conservative investor whose concern is mainly with the preservation of capital. When investing for a high dividend yield, the most important consideration is the sustainability of such dividends. Hence research into the underlying dividend payer is crucial. Please be advised I’m not making any tacit recommendations. Any investor who is contemplating investing for a high dividend should use these articles a base from which to do further research and in depth analysis.
In terms of valuation OSG is on a 1.21 times price to sales, is trading at just 70% of book value and a price to cash flow of 5.45 times. The company presents a very strong balance sheet, with a current ratio of 4.46 and cash on hand of $512 million, or $19 per share excluding debt. Shares in issue have also declined by some 30% since 2005. Fewer shares in issue result in a higher percentage ownership of the company for the individual investor and therefore higher dividends and earnings per share. The company had over the past few years repurchased 3.7 million shares in addition to 6 million odd it purchased back from Archer Daniel Midlands. That represents about 24% of the shares in issue.
The risk facing the dividend really relates to earnings, and explains why despite the attractive metrics mentioned above, the company trades on a fairly demanding PE ratio of 18.9 times. Net income was down 77% in fiscal 2009 from 2008.
The shipping industry as a whole made extraordinary profits in 2007 and 2008 from huge demand in China and other Asian tigers, as well as a general and unsustainable sudden increase in world demand. There was also a lack of supply of ships which resulted in price rises and a massive boom in the Baltic Dry Index, which measures ship rates for dry cargo and is the best approximation of the prices in that market. The lack of shipping supply also resulted in huge increases in orders for new ships financed by cheap and easy credit, creating a glut of supply which saw prices plummet.
Despite the plummet in earnings the company actually increased it’s dividend by 16% in 2009. This can be explained by the fact that cash from operations was down only 42% from the super-profit levels of 2009, and up almost 30% on 2007.
While worries persist on the overcapacity and oversupply in the shipping industry, many orders have been cancelled due to lack of credit and lower shipping prices. Shipping companies however are still generating cash and earnings. Such figures are below the super-profit levels of 2008 but very much in line with normalized earnings over longer periods of time.
In the case of OSG there is a potential red flag: debt levels are higher than the industry average, at a debt equity ratio of 0.98 times. Net interest cover in 2009 was only 1.56 times. I expect earnings to increase from this level, and believe the shippers will make money going forward. However I’d be cautious around OSG given high debt levels which are above the industry norm.
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