Wednesday, February 15, 2012

Safe Bulkers Inc. - Dividend Outlook For Year 2012

For the past two years it has been an annual spring ritual for Safe Bulkers Inc. (NYSE: SB) to tap the capital markets for fresh equity. In March 2010 and April 2011 the company raised $79.5 million and $42 million respectively in gross proceeds. Given the company’s existing new-building program (a total of 10 new-building vessels, six of which are scheduled for delivery during 2012), investors might be forgiven for anticipating a déjà-vu equity offering this spring, that will further dilute their equity holdings, and add pressure on the stock price.

Investors might also be concerned about the safety of the quarterly dividend of $0.15 per share, especially in anticipation of very weak spot freight conditions for the year.

To address such concerns we analyzed the company’s capital expenditure requirements, taking into consideration its fleet employment profile, debt repayment schedule, forecasts for the spot freight market during 2012, and the company’s current financial position.

Based on our analysis of the company’s fleet employment profile for year 2012, we believe that SB has the capacity to generate sufficient cash flow from operations to: make scheduled debt repayments, finance the equity portion of the $150.9 million capital expenditures for the year, and continue paying the regular quarterly cash dividend of $0.15 per share.

We based our analysis on the following two key assumptions:

With regards to the company’s fleet profile, we assumed that SB would generate an average TCE rate of $12,000 per day for the remaining open days, in line with current market forecasts for the year (Please note that we include in open days any index-based charter the company may enter into). SB has already fixed approximately 69% of its total available days for 2012, at an average TCE rate of $25,350, as of February 14th, 2012.

With regards to the company’s capital expenditure requirements, we assumed that SB would need to contribute a minimum of $60 million in cash equity or approximately 40% of the total amount required, in line with the company’s current debt to capitalization ratio (SB ended the year 2011 with a debt to capitalization ratio of 59.3%).

Based on the above assumptions, we estimate that SB would need to generate between $125 to $130 million in operating cash flow to meet all its capital requirements, a goal we believe is within reach, even after taking into account the present weak spot freight environment.

Given the company’s robust operating cash flow capacity, SB should be in a strong position to continue the regular payment of dividends for year 2012. The company would also keep dry most of its gunpowder of $83.5 million in cash, as of December 31st, 2011. This will enable Safe Bulkers to finance additional new-building orders as the opportunities arise, without having to first tap the equity markets.