Small-Cap Spotlight: Diana Shipping Taking On Water?

Looking at the top economies, China is in a bubble -- albeit one that could continue to grow -- India is showing clear signs of a slowdown as its finance minister attested to this week, and the financial crisis is taking its toll on Europe, as became evident when Germany (its largest economy) lowered its 2008 GDP forecasts.

As for the U.S., financial companies still have no clue to the exposure of exotic loans on their books, and the housing market is in the early innings of its downturn, and that is leading to a pullback in consumer spending. Also, it's difficult to imagine that China, India and Europe's economies will experience no disruptions when the largest economy in the world is on the verge of recession.

Turning away from the macro picture, most analysts are quick to point out the surge in dry-bulk day rates and how earnings will surge next year. But this catalyst is already on the table and therefore likely factored into the stock price, given that shares are up 100% even after the recent pullback.

Income-oriented investors are salivating at the 8% dividend, but in the long term this will be difficult to sustain. Diana uses roughly all of its free cash flow to pay its $2.32 dividend, which is more than 100% of its net income over the past 12 months. On the basis of the underlying strength in the dry-bulk industry, the dividend is likely to be secure through 2008, but any downturn in fundamentals or disruption in growth in China will lead to dividend cut.

Overall, Diana seems well-positioned to continue to benefit from strong industry trends, but considering the 100% gain in the stock over the past 12 months and a possible weaker global climate, there seems to be more risk than reward. Also, the huge surge in day rates is already reflected in earnings, removing a major short-term catalyst.