How Safe is This Shipper’s Massive Dividend? – Navios Maritime Partners L.P. (NMM)

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The shipping industry has been depressed for more than four years, causing investor sentiment to deteriorate. Despite early market indicators of an improvement in the dry bulk sector, 2013 is going to be another tough year for ship owners. Against this backdrop, Greek-owned shipping companies managed to remain at the forefront of the industry by controlling over 15% of the world’s fleet. Most importantly, the oversupply of vessels and the consequent decline in net voyage revenues did not stop Greek shippers from paying some juicy dividends.

Over the past five years, Navios Maritime Partners L.P. (NYSE: NMM), a leader in the seaborne transportation of dry bulk cargo, rewarded its faithful shareholders with an average dividend yield of more than 9%. But how safe are Navios Partners’ dividends?

Dividend profile

Navios has an admirable history of lavish dividend payments. It ranks among the five highest dividend-yielding stocks in the shipping industry. Despite the overall tough market conditions, the company managed to sustain a consistent dividend growth policy.

While the quarterly dividend stood at $0.35 in 2008, the company’s latest quarterly cash distribution of $0.4425 per common unit indicated a yield of about 12%. For 2012, the annual dividend was $1.77 per share. Navios Partners’ historical payout ratio based on earnings looks ominously high. But its relatively healthy payout ratio based on cash flows — a more accurate measure of Navios’s performance, given the company’s accounting strategy — suggests that its cash distributions are safe.

DryShips Inc. (NASDAQ:DRYS)

Financial and operating performance

Navios’s latest business moves all bode well for the continued health of its dividend.

Recently, Navios announced the public offering of 4.25 million common units. It intends to use the net proceeds primarily to fund its fleet expansion. Throughout 2012, the company acquired three new vessels, which contributed to increased time charter revenues. Hence, the firm achieved strong financial performance. For the last three months of 2012, Navios Partners exceeded analysts’ estimates on revenues and crushed expectations on earnings per share.

For the full-year of 2012, net income marked a 12% year-over-year acceleration, even after excluding a positive accounting effect from the restructuring of credit default insurance. Net cash provided by operating activities followed an upward trend, while the reserve for estimated capital expenditures remained flat. Thus, the company had enough available cash to provide funds for distributions. Throughout 2012, it generated a non-GAAP operating surplus (a measurement used to evaluate a partnership’s ability to make quarterly dividend payments) of nearly $149 million, up by around 30% on a year-over-year basis. It paid $106 million in dividends.

Moreover, Navios Partners essentially improved its fleet employment profile. At the end of 2012, fleet utilization was stronger than in 2011. In addition, considering the depressed levels of spot charter rates, the year-over-year drop in time charter equivalents (daily earnings generated by vessels on charter contracts) was relatively small. This way, the firm avoided risky cash bleedings associated with the gloomy demand environment.

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