General Maritime (GMR) told investors on Jan. 26 that it would begin paying a cash dividend. On its own, this isn't earth-shattering news, as it seems like at least one company each week has initiated a payout since Congress passed the new 15% maximum dividend tax rate in May 2003.Even so, when the energy tanker operator said its expected yield would be 18%, or about 10 times what the average S&P 500 stock offers, the company had my full attention. General Maritime is a leading energy transporter in the Atlantic Basin, with a fleet of 47 tankers. More than 80% of the company's ships operate in the spot market, in which volume and rates are dependent on current customer demand, rather than predetermined contractually. On a quarterly basis, General Maritime plans to return to investors any earnings before taxes, depreciation and amortization that top $100 million; that amount will be reserved annually for maintenance and fleet renewal expenses. The company said it will declare its first dividend after reporting first-quarter results at the end of April. General Maritime's current bond covenants in its debt contracts limit dividend payouts, but management is seeking to amend these rules, or could eliminate the debt altogether by April. Even though the stock has moved 20% higher since the announcement, I believe that the stock remains an attractive investment for income-oriented investors. While the company's payment could be volatile as the energy industry goes through its up-and-down cycles, shareholders should still receive a steady, tax-advantaged income over time. According to Jefferies analyst S. Magnus Fyhr, General Maritime would pay a dividend of $5.76 a share in 2005 (12.1% yield), based on a five-year average of tanker charter rates. Management estimated in a conference call with investors that during General Maritime's worst year, it still generated $240 million of annual EBITDA. That equates to about $3 a share of dividends, or a 6.3% yield at current levels.
This kind of strategy signifies to investors that management has run out of ideas in how to grow its business internally. Early in the business cycle, companies tend to retain profits and invest them back into their operations to grow in size. Once a company's organic growth begins to slow, management focuses on expanding through investing in new areas or making acquisitions. A company generally doesn't decide to offer a dividend until it no longer pays to try to grow the business. But General Maritime will be holding back $100 million of its earnings to maintain and expand its asset base, and said it remains interested in making small acquisitions down the road. The company's 33% debt/capital ratio is also at the low end of the industry range, so it can add debt to finance acquisitions if necessary. Even so, the company acknowledges that industry valuations have risen, and so was looking to attract the premium valuation that the other dividend payers in the tanker business currently command. This strategy isn't unprecedented, as Bermuda-based shipper Frontline ( FRO - Get Report) has been aggressive with its dividend over the past two years, recently yielding 18.6%. Some of General Maritime's other new high-yielding peers include Nordic American Tanker Shipping ( NAT - Get Report), Knightsbridge Tankers ( VLCCF) and November IPO Arlington Tankers ( ATB), all of which yield in a range between 7% to 13%. So why choose General Maritime? For one thing, according to Morgan Stanley analyst Mark MacLean, the company trades at a discount to its peers on a net asset value basis. In addition to its above-average dividend, General Maritime could also trade into the low- to mid-$50s from its recent stock price of about $47.80 a share, or 150% of its estimated $35-a-share asset value. This is in line with the valuation of its peer group, providing investors with a potential 20% total return in General Maritime over the next year.