It is heartening to see Genco Shipping (GNK: 7.39 +0.40 +5.72%) put on a new bulk carrier with Cargill for a minimum 4 year lease at a very nice rate. $65,000 per day! Thereseems to be quite a disconnect between the rates earned by quality shipping companies putting their ships on long term contracts and those trying to earn revenue in the spot market.
The $65k is the highest daily rate of any of the ship in Genco’s fleet. With 3 more new ships coming on in 2009 this news bodes well for the company’s future prospects. And, hopefully, the dividend will be secure.
It is interesting to see a company dance around a dividend cut in their press release. You can see from the title of the release linked above that Ashford Hospitality (AHT: 9.58 +0.17 +1.81%) went for the euphemism “Enhancing liquidity”. The suspension of the dividend is not mentioned until about the 6th paragraph of the press release.
I have noticed a couple of interesting items over the last few weeks. First, both AHT and Aircastle Ltd. (AYR: 14.29 +0.10 +0.70%) were significantly later (a week or so) than the previous year to announce their dividend position for the current quarter. It appears that boards of directors will drag their feet a little before announcing bad news. Or maybe it just takes them awhile to come up with the best terminology.
I added a small position of AHT to this site’s Opportunities Portfolio on November 6. I understood that the market was pricing the stock for a dividend cut and thought they had a chance to keep paying a significant payout. I was wrong. At this point I plan to “sell” the position out of the portfolio. It was interesting to see the stock price increase after the announcement was made to suspend the dividend. I guess all of the bad news was already priced into the stock.
My thoughts on Aircastle (AYR: 14.29 +0.10 +0.70%) are a little different. I was disappointed when they cut the dividend, but still think the financial position of the company is strong. The new dividend still gives the stock a yield close to 8%. The company is a cash generating machine and I hope they do something in 2009 to enhance shareholder value. Either resumption of the higher dividend or some asset purchases to increase cash flow would be positive. AYR will remain a component of this site’s Income Portfolio.
At this point I see a lot of fear that an extended economic recession will start to have an increasingly negative effect on business and individuals. I am more of the belief that the economy will have a blow-out-bad 4th quarter then start to recover. It takes a while for the various economic stimulus packages to start to stimulate economic activity and signs of their impact should start to show in the 1st quarter. The inauguration of President Obama should give a psychological boost to the country and the rest of the world.
The press release linked above announces a distribution agreement between Terra Industries (TRA: 0.00 N/A N/A) and Brenntag North America for the exclusive distribution rights of Terra Industries’ Diesel Emission Fluid (DEF). First, a little background on the use of DEF.
On January 1, 2010, EPA mandates that new on and off road Diesel powered vehicles will be required to comply with a new, lower level of emissions. To comply with the requirements vehicle manufacturers will be using a technology called selective catalytic reduction (SCR). The SCR process requires a urea based substance be injected into the exhaust so the catalyst can capture nitrogen oxide (NOX). DEF is the official urea based fluid that will be used in vehicles with SCR. NOX is the major pollution source from modern diesel engines (the 2007 emission rules eliminated the particulates) and SCR technology will remove over 90% of the NOX. All of the vehicle manufacturers offering Diesel engines will be using this technology.
Note: SCR technology has been used in European Diesel trucks for several years now with over 400,000 clean Diesel trucks currently on the road.
The new EPA rules will only apply to Diesel engines put in vehicles after 01/01/2001, so the initial use of DEF will be small and then grow as newer vehicles are purchased to replace older technology Diesels. Places like California will have mandates in place to force or encourage the retirement of older technology, higher polluting Diesel engines. Here are the projections for the amounts of DEF needed starting in 2010:
2010: 54 million gallons
2011: 172 million gallons
2012: 316 million gallons
2013: 463 million gallons
2014: 614 million gallons, and growing by 150 million gallons per year from there.
You can see the growth in demand will be there. What about supply. Terra Environmental Technologies is listed as one of the 5 manufacturers of DEF, along with Agrium Inc. (AGU: 83.28 +1.08 +1.31%), CF Industries (CF: 186.75 +4.45 +2.44%), Dyno Nobel, Potash Corp. (POT: 46.93 -0.33 -0.70%) and Yara North American, Inc. Brenntag is one of the 5 distributors of DEF I found listed. Brenntag is headquartered in Germany and is a global leader in the distribution of industrial and specialty chemicals.
Terra and Brenntag have a 2-way exclusive agreement for supply and distribution of DEF. It appears Terra’s penetration into this market depends on the depth of Brenntag’s sales connections. I know Terra management is high on this product as a growth market.
You probably noticed that the suppliers of DEF are all in the fertilizer business. DEF is a natural offshoot nitrogen based product from their nitrogen fertilizer production. Clean Diesel technology will be another growth area for some or all of these companies. I follow Terra Industries, but investors interested in this sector should get a warm fuzzy about another market for their product and start watching for DEF sales to determine which company will take the leadership in this product.
Shareholders in the various ProShares inverse and double-inverse funds received a pre-Christmas gift of the unpleasant kind. The article linked above from Index Universe lists the cash distributions made by 35 of ProShares ETFs ranging from 4.1% to 44.3% of the previous day’s NAV (December 22). The distributions will be paid in cash and are fully taxable as (mostly) short term capital gains. It appears no warning was given of the timing or amount of distributions, so many shareholders will be hit with a pretty healthy tax bill on gains they may not have earned.
Two weeks ago Rydex funds announced distributions of up to 86% on their inverse funds. I wrote about it here. The Index Universe article from that event that I used as a source opined that the ProShares inverse funds would not have distributions as large as the Rydex funds. Well, they were not as large but I doubt that is much consolation to the holders of the 20 ETFs that had distributions of 20% or greater.
Recently there has been discussion on whether heavy trading the double and double-inverse ETFs are a cause to the recent extreme volatility in the markets. My article on the discussion is here. I think the underlying lesson in this is that the leveraged ETFs should be used for short term trading only and there are pitfalls for the unaware investors in these products.
OUCH! This one caught me by surprise. Aircastle, Ltd. (AYR: 14.29 +0.10 +0.70%) is cutting their dividend from 25¢ to 10¢ for the 4th quarter. I had considered the dividend pretty secure since the company is generating around $1.10 free cash flow per quarter.
I see a couple of reasons for the board’s decision to reduce the dividend. First, the stated purpose of conserving cash is probably linked to the company’s order of 12 new Airbus A330s. The first of these will be coming in 2010 but the company needs to make $120 million in pre-delivery payments in 2009. They plan in financing about 2/3 of the cost of the new jets, but may want to have more equity available to reduce the amount of borrowing.
In the recent earnings conference calls I got the impression that the company management was not happy with the way the market was treating the shares and felt that if the dividend payout was not helping to prop up the shares, they could find a better use for the cash. I think this line of reasoning short changes shareholders who have held on during the financial crisis with the understanding the company was solvent and would continue to support the dividend.
If management’s assertion that their cash flow remains strong is true, I hope to see some announcements in the near future concerning the company’s attempt to improve the business. This is from today’s press release (emphasis added):
Aircastle CEO Ron Wainshal commented, “The company’s cash flow remains strong. However, in light of the unprecedented turmoil in the financial markets and current uncertainties in the global economy, we believe retaining cash is a prudent step which will strengthen Aircastle’s balance sheet, enhance our financial flexibility and enable the company to take advantage of attractive investment opportunities.“
Although I like Aircastle’s business model, I do not see much value in the stock until either 1) perception of the global economy changes to the positive or 2) the company takes a positive step to increase shareholder value. The perception of the market is that Aircastle is at risk due to their level of debt and exposure to the economic slowdown. I am pretty sure this is not true, but I do not think the market has the same view I do. Right now I see no compelling reason to hold the stock.