DHT Holdings Is Creating Economic Value And Returning It To Shareholders
The rules of the game seem to change constantly when investing in stocks, but the metrics we professional stock analysts use to value stocks never change. The basics of cash flow and returns on capital employed have not changed during Covid-19, and no amount of action by the Fed or other central banks will change this. To find stocks to hold for the long term, simply look for companies that are creating economic value from the capital they have been granted. In these days of low/no cost of money, it also helps if these companies are proactively returning that economic value of shareholders in the form of dividends and share repurchases.
It is the motto of my firm, Excelsior Capital Partners, but cash flow never lies, and with second quarter earnings season about to end, stock analysts should be awash in fresh info about cash flows earned in the first half of 2020. This makes predicting the cash flows that will be derived by companies in the second half of 2020 that much easier. I choose not to predict political events like the upcoming U.S. election, and macro factors like the Fed’s actions are not entirely useful in my evaluation process, either, although somewhat easy to predict these days. Always expect easy money from this the Fed, especially with Powell at the helm.
So, what I try to do is predict cash flows. When I find a company that is creating economic value, I attempt to divine whether those cash flows are—to use the hip phrase—sustainable.
One such opportunity is now apparent in the financial statements of oil tanker shippers, specifically those that focus on the largest sub-segment, the aptly named Very Large Crude Carriers (VLCCs.) This sector exists because oil is often consumed far from where it is produced. A simple look at the figures would show that the world’s population growth is occurring in places (India, China, etc.) that are net importers of crude oil. These growing—and enriching—populations need oil to fuel transportation and for other uses, and ships are most often used to carry massive crude cargoes from one place to another.
The rates for oil tankers showed a spike characteristic of other commodity goods in late-February through April, but have since settled into a pattern of very little volatility around historic norms. There is no glut of seaborne oil capacity evidenced in these figures, nor has there been a huge fall-off in demand caused by coronavirus lockdowns. It’s almost as if the world is returning to normal, and for oil tankers that is certainly the case.
I have been investing in shipping stocks for the past two decades and I have seen some massive overreactions to the inevitable short-term spikes in pricing for the shipping of commodity goods. I remember in the dry-bulk sub-sector (primarily coal, iron ore and grains) when shipowners were placing orders for new ships from shipyards that were themselves under construction. It’s not 2008 anymore, thankfully. The combination of scarcer capital and smarter managements have obviated the possibility of a massive wave of new orders for VLCCs in 2020, thankfully.
So, to analyze a shipping stock, one must move from the macro to the micro. Financing is scarce for everything—with the possible exception of U.S tech stocks—these days, so one might assume that companies that own operable oil tankers might be in advantageous positions over their competitors. That is clearly the case.
The top holding of my firm, Excelsior Capital Partners, is DHT Holdings, an owner of oil tankers. DHT’s fleet is composed entirely of VLCC tankers, 27 at the current time. DHT management made the decision to take some of the ships out of the spot market and sign them on longer-term time charters with charterers. DHT had 4 such ships on December 31st, 2019, and, as of June 30th, now has 10 if its 27 ships on long-term time charters. So, this is a management team that is prioritizing cash flows over day-rates, and taking a little money of the table by essentially renting out ships instead of just charging for single voyages.
Such management also makes DHT’s cash flows much more predictable than if they were 100% dependent on movements in the market for oil tankers. The numbers are simple.
In 2019, DHT spent $53.359 million on activities classified as “Investments” in its consolidated statement of cash flows. In the quarter ended June 30th, 2020, DHT produced free cash flow (after capital expenditures) of $177 million. That free cash flow figure was $127 million for the quarter ending March 30th, so DHT’s “payback period” on its 2019 capex was about one month.
That is an extraordinary return on invested capital.
So, DHT management has two choices: increase those investments massively, or return those windfall profits to shareholders. DHT management has clearly chosen the second option. The company has prepaid all of its mandated 2021 interest payments and recently announced the call for conversion, as of August 21st, of the full complement of $119 million of 4.5% convertible notes outstanding that had been due in 2021.
So, those smart enough to lend to DHT are getting paid back early, and those of us who have held onto the stock are also reaping real rewards. DHT management declared a second quarter cash dividend of $0.48, payable September 2nd. That dovetails nicely into the recent history of payouts, as noted below
DHT Holdings Announced Dividend Payouts
DHT is trading at just under $6 per share as of this writing. I realize that we are in a Fed-driven, zero-interest-rate, tech-tech-tech market, but one would be foolish to overlook the real returns delivered to DHT shareholders by its management. DHT is the largest individual shareholding of my firm, Excelsior Capital Partners, and I have no plans to reduce that stake for the foreseeable future.