JTShideler (93.92)

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Could a Dividend Cut Actually be Good for Stock Price?

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May 14, 2009 – Comments (5) | RELATED TICKERS: GASS , DRYS

Okay one of my favorite stocks Stealth Gas (GASS) suspended its dividend today, with the normal market reaction of the price diving 20%. Stealth Gas is a small CAP firm in the Liquid Petroleum Gas transportation industry that saw its share price obliterated largely in response to downturn in other shipping segments.

The problem is it's segment, the handisize segment, has not been affected by the steep drop in charter prices. So this company that has been paying 18.75 cents per share a quarter since 2004 ended up with an effective yield in the first 1Q of over 17% as the stock price traded between $5 and $6, with a Net Asset Value of around $14.34 giving it a P/NAV of about x0.41 per share. For comparison, DRYS with a NAV of $5.42 trades for X1.17 P/NAV and GASS had been profitable and paying its dividend while the rest of the shipping sector cut it long ago.

Managements take was basically if investors don't appreciate the dividend and it doesn't help support the share price? Why pay it, if they think they can use the money more productively in other areas?

I have been following Stealth Gas since 2005 when I first made the thumbs up call and have watched the company grow from 9 ships to almost 46 ships in under 4 years while maintaning a conservative debt to equity ratio of around .5. After looking at the numbers and listening to the conference call I actually agree with their assesment, if the dividend wasn't helping share price, they have a responsibility to take that cash and use it somewhere that would.

Just my thought.

DISCLOSURE (LONG GASS but secretly hoping a lot of traders will depress the share price so I can buy more at the $3 range like before.

5 Comments – Post Your Own

#1) On May 14, 2009 at 3:34 PM, ikkyu2 (99.40) wrote:

Dividends are not good for long-term shareholders because of double taxation. Dividends are paid out of after-tax corporate profits, which are taxed at corporate income tax rates; then they are taxed again at the dividend rate as personal income to the shareholder. The company ownership, therefore, gets taxed twice on each dollar passed through to itself via dividends. Investors think they like dividends, but if they were thinking like the fractional company owners whom they actually are, they would hate dividends.

Dividend paying stocks held in tax-advantaged traditional accounts like 401(k)s and IRAs would seem to be immune, but in fact are not, as the dividend is eventually taxed at income tax rates when withdrawn. Only dividend stocks in a Roth vehicle are immune, and few shares overall are held in such a vehicle.

The right way for management to use spare cash to support shareholders is share buybacks. Exxon Mobil pays a small dividend but also returns a great amount of cash to shareholders by buying back shares. The trouble with this strategy is that it makes it difficult for non-shareholders to find an attractive entry point for the stock, but that is not the company's problem.

The question becomes, is GASS planning some share buybacks with their spare free cash flow, or are they battening down the hatches for a massive decrease in their future cash flows?

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#2) On May 14, 2009 at 3:34 PM, portefeuille (99.74) wrote:

Could a Dividend Cut Actually be Good for Stock Price?

I guess there is a 50% chance that the dividend a company is paying is too high (meaning that a lower dividend would be "better for the company") and a 50% chance that it is too low.

As to "good for stock price" it is the usual game of "market expectations", "buy/sell the rumour" and all that ...

As to that specific company I have no opinion.

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#3) On May 14, 2009 at 4:45 PM, JTShideler (93.92) wrote:

Management seems to be hoarding the cash for potential acquisitions although I kind of agree with the analysis that asks the last question that there is no better asset then your own shares if you really believe that your assets are worth 14.34 a share. I always thought there was a huge liquidity issue since their is only 22 million shares outstanding but today then had no problem with 500k shares changing hands the busiest I have ever seen it.

Transcript of Conference Call:

http://seekingalpha.com/article/137767-stealthgas-inc-q1-2009-earnings-call-transcript?source=yahoo

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#4) On May 14, 2009 at 4:58 PM, Rehydrogenated (35.10) wrote:

Paying a dividend should be a function of how much return you can get for that cash. If your a stable company with constant cash-flows and little room for growth, having cash won't help you, so it's better to pay a dividend, otherwise your stock will stagnate.

As far as being good for the share price...

In one way, the share price won't have to be adjusted downward by the dividend each quarter.

In another way, if that cash is spent on positive projects it should help the company grow faster, which would increase the share price. It also improves liquidity and cash flow, decreasing risk, which eventually will mean something again.

I think a lot of companies are making the same decision as GASS, it's wise to save the cash now because the stock market isn't trading based on value, its trading based on OMFGWTFDOIDO?

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#5) On May 15, 2009 at 10:03 AM, JTShideler (93.92) wrote:

Looks like MorganKeegan analysis is trading on the OMFGWTGDOIDO philosophy also, as it downgraded GASS today to Underperform. I am really surprised that GASS isn't a takeover target.

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