When you chase yield sometimes without prospecting the business well, you might be in for some hurt. Rickmers have to be conservative and STOP Paying Dividend.
One of the highest yielding stock on my Dividend Stock Tracker is Rickmers Maritime at 10% to 14% yield. Recently the share price stagnates at $0.30 but dropped to $0.20.
When folks ask me about it, I told them to prospect well, Rickmers as a shipping trust, were incorporated during the peak shipping cycle, so a lot of the ships was chartered out at very high rates.
Provided the charterers do not default, Rickmers enjoy high rates that will be very hard to revisit in a long time.
From the latest third quarter announcement, we can see they have a lot of charter expiring in 2016 at high rates.
The rates versus the average current rates is more than half, which means once renewed, the cash flow will drop in half.
The cash flow needs to pay US$400 mil in loans. Out of US$70 mil in EBITDA, $48 mil will be used to pay down the principal, US$15 mil in interest, it leaves just about US$7 mil to pay dividends.
To pay the current US$0.006 dividend per quarter, it requires US$20 mil in total.
So the dividend is unsustainable.
The lesson learn here is, if you have bought in, without having an understanding of the nature of how the cash flow comes about, you may not have factored in this chartered renewal problem.
While investing in passive dividend income is appealing, at the end of the day, understanding the business, understanding value, cash flow, business risk is just as important.
In the future, it is likely I will remove this stock from my Dividend Stock Tracker, which contains the prevailing dividend income yields of blue chip business, real estate investment trusts and business trusts.
Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
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Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
You can view Kyith's current portfolio here, which uses his Free Google Stock Portfolio Tracker.
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You can read more about Kyith here.
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Lance
Thursday 5th of November 2015
Hi Kyith, should we cut our losses for Rickmers considering this situation? Or should we wait ?
Kyith
Thursday 5th of November 2015
Hi Lance,
I am sorry to hear that. I can't tell you what to do with your money, but to evaluate that this investment is sunk. By that, it means that if you ask yourself this question would you buy this company at this share price at this point, you will come to a conclusion. The question to ask management is what is their timeline of resumption.
Shipping charter rates do fluctuate and can be rather cut throat and it will require a fair bit of margin of safety to invest even in a trust. I am looking at another shipping trust, so essentially there is nothing wrong with the structure, it is the price for a known intrinsic value.
Going forward the cash flow for much cannot revisit the hey day of 2006-2007, so the value will be dramatically lower.
Kyith
Kyith
Han Lim
Thursday 5th of November 2015
HI Kyith,
What is your comment regarding APPT (Asian Pay TV Trust)? Thanks.
Kyith
Thursday 5th of November 2015
Hi Han Lim,
APTT flirts very close to the cash flow that they need to pay off debt, and from the last few records from my opinion seems to be paying out of debts more. I would steer clear.
Linton Phoa
Thursday 5th of November 2015
Hi Kyith,
According to your concept of sustainable dividends should be less than free cash flow yield, am I right to say that Keppel REIT and Suntec REIT are paying unsustainable dividends as their free cash flow yield is much less than their dividend yield?
What is your take on this?
Linton
Kyith
Thursday 5th of November 2015
Hey Linton,
Good question. But note that due to not paying tax, theory wise the reits can pay more than earnings, but they should play within the free cash flow constrains.
Also their payout quarterly may be more than cash flow. So its better to asses full year
Tiong Hum Soh
Thursday 5th of November 2015
Hi Keith, thank you. You are brining up stories not covered elsewhere. May I suggest that besides being incorporated at peak of shipping cycle and now suffering because shipping is falling, Rickmers is also suffering from rising interest rates. Would you be keen to do such a story - impact of rising rates to Reits?
Kyith
Thursday 5th of November 2015
Hi Tiong Hum,
I think I did quite a fair bit on rising interest on reits. I felt that the risk is low, because everyone assumes that the short term rates will rise to 4%.
The impact is if debts are floating and cost will go up. The second permutations is the competition against other Wealth assets when risk free goes up.
Kyith