More on NMM:
Navios owns and leases a fleet of 16 dry-bulk carriers to shipping companies such as Mitsui, Cargill, and Cosco. These ships carry dry-bulk cargo such as grain, coal, ore, and cement mostly to Asia. The entire fleet is leased under long-term contracts of three or more years with an average remaining term of 4.6 years, and contracts are insured by a European Union governmental agency. Navios was spun off as a MLP in November 2007 by Navios Maritime Holdings which owns 27% of NMM.
The dry bulk carrier has grown the quarterly dividend an average 7% annually over the last three years. The latest quarterly dividend of $0.43 per share equates to $1.72 annually, providing a forward yield of 9.1%.
As a partnership, Navios distributes most of its available cash to unitholders. The company paid out distributions of $72.3 million in 2010, 2% of which was paid to the general partner as incentive distribution rights. Distributions were paid from cash available for distributions of $76.9 million, for a payout ratio of 94%.
Dividends are summarized on a regular 1099-DIV form, not the K-1 schedule associated with MLPs. This tax treatment also means distributions can qualify for the reduced 15% tax rate, unlike most partnerships.
In 2010, 79% of the distributions qualified for the reduced dividend tax rate, and 21% were considered a return of capital. Return of capital isn't taxed when received, but it reduces your cost basis, and the difference is taxable as ordinary income when you sell the units.
Given that the lion's share of the distribution is tax-advantaged, Navios can be held in a taxable brokerage account. However, since it doesn't throw off UBTI like other
partnerships, it also can be held in an IRA without creating a potential tax liability.
The shipping business is highly cyclical, with wild swings in charter rates, profitability and vessel values. For example, from January 1, 2009, to December 31, 2010, the Baltic Exchange's average daily charter rates for Panamax vessels saw a low of $3,917 and a high of $37,099. Capesize vessels moved between a low of $8,997 per day and a high of $93,197 per day. Meanwhile, the Baltic Dry Index, which reflects the average daily charter rates for dry bulk carriers, swung between a low of 772 points and a high of 4,661 points.
But Navios is largely immune to these swings because it locks in rates under long-term leases. Over the past five years, earnings have grown an average 26% annually, thanks to long-term contracts at favorable rates and vessel acquisitions that have been accretive to cash flow.
In 2010, five new vessels, all with long-term charters, helped generate an impressive 55% year-over-year increase in revenues. Net income of $60.5 million rose 76% over a year earlier. However, on a per-share basis earnings increased only 3% to $1.51 as the company doubled its outstanding shares during the year to pay for these vessel acquisitions.
The company is well-capitalized, with long-term debt of $292.3 million, just 37% of total capitalization.
At year-end 2010, the fleet was contracted out at 100% for 2011, 95% for 2012, and 75% for 2013. These contracts will generate assured revenues of approximately $177 million this year, $170 million next year and $134 million two years from now.
The contracts call for an attractive average daily rate for its fleet of mostly Panamax and Capesize vessels of $30,248 in 2011, $30,669 in 2012 and $32,560 in 2013. These rates are extremely favorable, considering the average daily long-term charter rate for 2011 is currently $13,513.
The company grows by acquiring vessels with long-term charters, typically from parent company Navios Maritime Holdings. These acquisitions cost between $75 million to $100
million per vessel. Since the company's policy is to pay out most of its cash flow to shareholders, the frequent issuing of units to raise the capital needed to buy these vessels is a risk factor.
In the past year and a half, the company completed six secondary offerings, which doubled the outstanding units from 17 million at year-end 2009 to 34 million in 2010. In addition to any future planned equity offerings, one million subordinated series A units will be converted to additional units in June 2012 and entitled to receive distributions.
The repeated share issues do make the units more volatile and could eventually impact distributions. So far, however, management has successfully employed the equity capital to grow earnings and distributions. As a result, the units have traded higher and the company has priced the offerings consistently higher, from $10.32 per unit in May 2009 to $17.65 in October 2010. |
