Dorian LPG: Buyout of 20% and more of LPG stock, no regular dividends
In the last review of the liquefied petroleum gas shipping company, Dorian LPG (NYSE: LPG) in October 2021 they had recently declared their first ever dividend and although it was only labeled as a one off big special dividend it raised the prospect that a new super high yielding investment might be in the works like my article previous discussed . Following this exciting outlook, this article provides follow-up analysis to examine their subsequently released financial results and, more importantly, to see how their capital allocation strategy has played out, which now sees them repurchasing more than 20% of the company.
Executive summary and ratings
Since many readers are likely short on time, the table below provides a very brief summary and scores for the main criteria assessed. This google doc provides a list of all my equivalent ratings as well as more information about my rating system. The following section provides a detailed analysis for readers wishing to delve deeper into their situation.
*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to use free cash flow as it provides the strictest criteria and also best captures the true impact on their financial situation.
After a slow start to their 2022 fiscal year in the first quarter, their cash flow performance recovered in the following two quarters, with their operating cash flow for the first nine months of $88.8 million. dollars now remaining broadly stable year-over-year compared to their result of $87.6 million in the first nine months of their 2021 financial year. These strong results have seen their free cash flow remain at a level relatively large $65.2 million in the first nine months of their 2022 fiscal year, despite their capital expenditures more than doubling year-over-year to $22.2 million. Luckily, this sufficiently funded their first big special dividend which cost $40.2 million and given that their free cash flow in the first nine months of their 2022 fiscal year cancels out at around $87 million, it should be able to fund their second equal sized special dividend during the fourth quarter of their 2022 fiscal year.
In addition to removing any impact to their financial position from these large special dividends, this free cash flow also allows their shares to trade with a free cash flow yield of nearly 18% given their current market capitalization. around $490 million. While this provides the opportunity to fund a very high dividend yield, as my previous article hoped, management has apparently given no indication that regular dividends are coming or if there will even be more special dividends, but instead highlighted their new stock buybacks, per the quote below.
“This morning, we announced our board’s decision to authorize share buybacks of up to $100 million.”
-Dorian LPG Q3 FY2022 Conference Call.
While their management hasn’t explicitly ruled out dividends, the lack of commentary on the matter means they seem to be more focused on returning cash via share buybacks, especially given this new 100% allotment. millions of dollars. Given that their current market capitalization is around $490 million, this amounts to buying out just over 20% of the entire company, with the timing depending on market conditions and their financial performance, according to comments. of direction included below.
“…first of all to answer your question about the deadline, there is no deadline. Second, how we execute must consider all factors, obviously including profit and price. So we see the value here and we see – but we don’t commit to execution in any particular time frame.
-Dorian LPG Q3 FY2022 Conference Call (previously linked).
Given that this new $100 million stock buyback award equates to over a year of free cash flow at their current performance, it stands to reason that shareholders will not receive any further material special dividends in a foreseeable future. Each investor is entitled to their own preferences and opinions, although I remain of the view that dividends are more favorable as they offer a more tangible and quantifiable reward to shareholders than share buybacks which obviously see their effectiveness dependent on performance future of their share price. While this is less of a concern for companies operating in very stable industries, the broader shipping industry is notoriously volatile and difficult. Despite their strong cash flow performance since 2020, it is still worth remembering that their operating cash flow fluctuates greatly over the years, as shown by their historical long-term cash flow performance, which makes the prospects for the effectiveness of their share buybacks particularly uncertain.
In the two fiscal quarters of earnings that followed my previous analysis, their net debt decreased only slightly to $470.2 million from its previous level of $500.9 million, as they began to return more cash to their shareholders through their large special dividends. This means that their leverage and liquidity have not changed significantly since the previous analysis, which means that it would be redundant to reassess them in detail and therefore if new readers are interested, please refer to my previously linked article. The two relevant charts have always been included below for reference, showing that their leverage remains at the bottom of high territory with a net debt to EBITDA ratio and a net debt to operating cash ratio of 3.45 and 3.74 respectively, while their current and cash ratios of 1.83 and 1.22 show that their liquidity is strong.
Their cash performance has remained strong since the previous review and has thus funded their large special dividends, although management opts not to pay regular dividends as hoped and favors share buybacks instead. While I personally would have preferred to see regular dividends or other special dividends, their share buybacks should help drive their stock price up or at least provide support and so given their free cash yield of close to 18%, I think maintaining my buy rating is appropriate.
Notes: Unless otherwise stated, all figures in this article are taken from Dorian LPG’s SEC Filingsall calculated figures were performed by the author.