SHIPPING share prices have been plunging since summer and continue to fall. Equity is trading at a widening discount to net asset value. Cue the multimillion-dollar share buybacks by pubic shipowners.

D'Amico International Shipping has spent $3.2m buying its own shares in 4Q24 through Monday, after spending $6.5m in the first nine months. Hafnia’s board authorised up to $100m in buybacks starting December 6, and announced an initial purchase of $15.5m in shares on Monday.

Diana Shipping has a tender offer open through December 31 for the purchase 15m of its own shares for $30m. Last month, Safe Bulkers authorised a new repurchase programme for 5m of its shares and Cool Company authorised the repurchase of up to $40m of its shares.

Over the first nine months of 2024, International Seaways spent $20m on buybacks, Star Bulk $19.2m, Navios Partners $18.3m and Scorpio Tankers – by far the biggest employer of buybacks in public shipping – spent a massive $296.7m.

From a layman’s perspective, the large sums spent on buying back shares can seem curious.

Share repurchases lower share counts and raise earnings per share, NAV per share, and other per-share metrics. But investors benefit from the stocks they buy in only two ways: from capital gains if share prices rise and from dividends.

If a shipowner spends money on buybacks as opposed to dividends, the benefit to the shareholder hinges on the future price of the shares. Shipping is highly cyclical and prone to extended rate downturns when share prices remain depressed for lengthy periods.

As Stifel analyst Ben Nolan said in a research note last month, “In a situation where rate momentum is negative or there is the perception of rate risk, valuation metrics like NAV do almost nothing to support share prices.”

Which raises the question: If shipping share prices decline over a period of time due to cyclical reasons outside the control of management, and millions are spent on buybacks during that period, with share prices sinking below the price paid by the company on buybacks, and with investors not receiving any capital gains, wouldn’t it have been better for shareholders if that money had been paid to them via dividends instead, or if the shipowner had just retained the cash? 

Rationale for buybacks

Chris Robertson, shipping analyst at Deutsche Bank, told Lloyd’s List, “It comes down to what your investment horizon is. Buybacks are a long-term strategy. If you’re purchasing shares into a downturn today, the highs later will be higher than they otherwise would be from an EPS perspective because there will be fewer outstanding shares.”

Use of buybacks “is also clearly a point of view of management”, added Robertson. “If the general market believes NAV will be going down because asset values are declining in the future, equity markets sometimes overshoot a bit, then correct later as the market turns to the positive. Management may have a view of, ‘Hey, the market overshot. Investors are expecting more of a downturn than we do, so our shares are too cheap relative to NAV.’”

According to J Mintzmyer, founder of Value Investor’s Edge, “I think there are some massive misconceptions on what a ‘proper’ buyback is. Buybacks are not meant to keep shares from falling or to make shares trade higher in the near term.

“Buybacks should only be pursued if the firm believes an investment in the firm’s fleet at the market pricing – the discount to current NAV – is attractive over the long term,” he told Lloyd’s List.

“If the firm would be open to buying more similar ships at market prices and its stock trades at a sizeable discount to NAV, then share repurchases would be superior to buying more vessels. If the firm is lukewarm or bearish on the forward market and the stock trades at a discount of 30% to NAV and the firm would gladly buy assets at a 20-30% discount to current market values, then repurchases might make sense – as this is exactly akin to buying the same fleet at a discount.

“If a firm is buying back large volumes of shares for the correct reasons – i.e., buying attractive assets at a huge discount due to market pessimism – then the firm should wish for shares to trade as low and as weak as possible while the buyback programme is underway.”

Robertson said, “If you look to find deals on secondhand tonnage in the S&P market, that secondhand tonnage might be priced at NAV, whereas your own fleet is priced below NAV because that’s where your shares are trading now, so it’s a relative deal.

“You’re not going to be rewarded as a public company for just hoarding cash on the balance sheet beyond a reasonable level. If there are attractive market opportunities to deploy capital to increase your asset base, that’s what you have to measure [the buyback programme] against.

“If there were attractive opportunities in S&P now, that would be one thing, but newbuilding prices are still elevated. Five-year asset prices have come off their peaks but they’re also still pretty elevated. So, what do you do with the cash?”

Buybacks vs dividends

Most of the public shipping companies have focused over the past year on debt reduction first, dividends second and share repurchases third (Scorpio is an exception, spending 4.6 times as much on buybacks this year than dividends, although spending 2.4 times as much on debt reduction than buybacks).

Asked about the choice between paying dividends versus share repurchasing, Robertson said, “Some investors are more short-term-oriented and would like to see every red cent paid out as a dividend during the good times, but that’s not feasible for a shipping company that plans to operate over the longer term. It doesn’t always make sense to just return everything as a dividend.

“Dividends are more of an immediate reward to your shareholders at any point in the cycle, so there’s a tradeoff between the short-term reward of the dividend and long-term reward of share repurchasing.”

He continued, “Investors are a mixed bag. Some of them are definitely more dividend-oriented, while some will be more attracted to companies with share-repurchase programmes. There’s always going to be tensions between different blocks of shareholders.”

According to Mintzmyer, “If the fleet is trading at a huge discount and the firm believes this is unjustified, long-term shareholders can do much better with buybacks [than dividends].

“For a hypothetical extreme example, if shares trade at a 50% discount to NAV and the firm has ample cash liquidity and asset prices are generally expected to remain stable, then every $1 spent on buybacks is worth $2 to long-term shareholders. Dividends are worth $1.”

Other arguments for buybacks

Mintzmyer also pointed to additional benefits from buybacks in the current environment.

He noted that public shipowner debt levels are much lower than they have been in past cycles. “In today’s public shipping markets, balance sheets have never been stronger. Of the 47 shipping firms we cover, only seven have leverage greater than 50%. Eleven have net debt of less than 20% and a few even have net cash balances, with very low to zero debt.

“This means that the overall discount to the enterprise value [net debt plus market capitalisation] is much larger than in previous cycles.”

That makes the NAV discount justifying buybacks more compelling, because it takes more of a decline in physical asset values to erase the share discount of a lower-leverage listed owner.

“For example, if a firm has 50% leverage and trades at a 60% price to NAV [P/NAV], a 20% asset price decline would wipe out the entire P/NAV discount. If that same firm has 0% financial leverage, it would take a massive 40% asset decline to offset the same P/NAV discount,” said Mintzmyer. “If buybacks are pursued for the correct reasons, the firms with low leverage are in the best position to drive long-term value.

“Buybacks, if done correctly, grow the company on the only metric that shareholders care about: per-share metrics,” continued Mintzmyer. “Would you rather own 10% of a fleet of 100 ships or 30% of the same fleet of 50 ships?”

He offered another example: If a public shipowner with 100 ships and 100 shares (one ship per share) had shares trading at a 50% discount to NAV, then sold 20 ships at NAV and used sale proceeds to repurchase 40 discounted shares, it would be left with 80 ships and 60 shares, or 1.33 ships per share. The ships per share would increase 33% with no effect on cash balances or leverage.