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Monday, June 27, 2011

Why NAT Operates Like A Ponzi Scheme(NYSE: NAT)

NEW YORK - Jim Cramer host of Mad Money made a passionate plea today against an article writer who declared Nordic American Tanker a Ponzi scheme. The company sort of meets the definition but obviously it is different when its transparent. The difference is investors are of course aware of their structure and investors also hope that over time the company will be profitable enough that the structure made sense. However their structure is highly contradictory.

Lets take a look at NAT's capital structure last year the company made 61 million of Earnings plus depreciation ignoring the other small items that is $61 million of liquidity. The company then net borrowed $75 million. Now we are at $136 million in Liquidity. The company then bought $195 million in ships. Now we are at a shortfall of $59 million. The company then issued $136 million of stock for a positive end total of $80 million and $80 million in dividends were paid.

Of course you could stick your head in the sand and say the shareholder money was for this, the dividend money was from this but in reality at the end of the day the money had to be made up from somewhere and it was from new investors.

Obviously the new investors know what is going on so this precludes it from being a Ponzi scheme. Investors obviously feel there is value in the stock. Which is why the company is able to issue equity.

However lets examine the real important issue of what is the point of paying a dividend and issuing stock. You are essentially telling your investors you can earn more on this dividend then the company can earn itself. Then by raising capital you dilute the original investor to owning less of the firm so each future dollar of earnings is smaller.

It is a very counter intuitive structure regardless of what Jim Cramer says. The only reason to pay a dividend is because the money cannot generate sufficient returns elsewhere. You raise stocks because you can earn sufficient returns on that equity. By doing both one contradict themselves.

The two don't mix. Regardless of what you call it. It is a structure of circling money. The owners would be better off having no yield on their investment and keeping a larger share of the profits if they believe in the company. Unless the business isn't very profitable then they would prefer new investors pay them money in the form of dividends.


4 comments:

  1. Really? Please. As long as rates are above 11k a dividend is paid. It fluctuates due to the spot rate as NAT does not have but one long term contract and it's about to end.

    There have been times, though very few, of no dividend. Know what you are talking about. This company throughout it's existence has paid out over $45.00 per share. Worth owning if you like double hull suez tankers.

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  2. That is a pretty bad way to justify its value by saying how much in dividends its paid out. Since that is being made possible by the people that raise the funds.

    As mentioned above if the company can earn amazing returns you want less shareholders. By issuing more and paying dividends which are cash and earn nothing is not productive.

    What you are saying is investors have still made lots of money. My whole argument is the structure is a value destroying initiative. If Coca Cola did this from 1900 yes the stock would still be worth $200 B today but if you bought $1 in 1900 it would be worth much less today than had Coke not issued dividends and issued stock to pay those dividends.

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  3. A agree that something is wrong. Either the company pays dividend from profit or they dilute shares if there is a need to raise capital. It is contradictory to do both.

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  4. Thank you Josh! You're article hits the nail on the head. There is something rotten about NAT and it's obvious that the management has no interest in retaining shareholder value.

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