The impact of dilution
While rates are expected to rise back to 2010’s average, Nordic American Tanker Ltd. (NAT) won’t rise back up to its 2010 price level—unless rates rise higher—for one reason: share dilution. From 2010 to 2013, the company had raised money by issuing new shares and outstanding shares rose from 46.9 million in 2010 to 75.4 million as of the end of 2013.
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Past investors and dividends
Over the same period, Nordic’s shipping fleet barely grew. In 2010, the company had 19 vessels. At the end of 2013, it had 20. You could say these share issuances were more or less used to support dividends that were (partially) unfunded. This activity benefited past investors who collected dividends from the company. While shares have fallen ~65% since the end of 2010, NAT investors’ total turn, which includes dividends, would have fared better. But this means that current investors would be disappointed to see that Nordic may not see a price of $25 anytime soon.
Paying dividends or expanding
New share issues aren’t unique to Nordic. Other peers, such as Frontline Ltd. (FRO), Tsakos Energy Navigation Ltd. (TNP), and Teekay Tankers Ltd. (TNK), have also raised capital over the last few years. But it’s important for investors to differentiate whether such capital was used to support the company from going under or to maintain dividend payouts, or whether they were largely used to expand vessels. Teekay Tanker, for example, increased its shipping fleet from 15 to 29 from 2010 to 2013.
Max target price of $15.53
Since NAT’s share count increased 61% from 2010 and 2013, share prices will have to fall by a multiple of 1/(1+61%), or 1/1.61. If this isn’t intuitive, assume that share count for a company doubled while earnings were flat. Then on a per-share basis, earnings will be halved: (1/(1+100%)) * earnings. So if people are willing to pay the same valuation for NAT as they did in 2010, an increase of 61% in share count should translate to a target price of max $15.53 a share (1/1.61 x $25). Note that Nordic has increased leverage since 2010. Because debt incurs interest expense, the actual target price will be a bit lower.
Note: Buying individual companies comes with risks unrelated to industry fundamentals. Investors who don’t understand such risks might want to consider the Guggenheim Shipping ETF (SEA), which invests in large shipping companies worldwide.
To learn more about investing in the marine shipping industry, see the Market Realist series Why a tranquil oil tanker space creates investor opportunity.