It appears that Nordic American Tankers (NYSE: NAT) has gotten its ship in order. The company has a fleet of 23 tanker ships, and after several years of burning cash, it is producing positive cash flow.
And this year, free cash flow is forecast to double last year’s total.
This year, Nordic American Tankers is expected to generate $103 million in free cash flow while paying out $62 million in dividends for a payout ratio of 60%.
In a normal year, that would not be a problem. But no one would describe 2020 as a normal year.
Normally, anything below 75% is fine. But because of the severe economic damage caused by the virus, I have reduced the payout ratio limit to 50%.
That’s an admittedly conservative number, but I don’t want investors to get caught by surprise if a company cuts its dividend.
Lowering the payout ratio threshold to 50% gives me more confidence that a company will avoid a dividend cut even if 2021 is difficult.
If the economy rebounds, I will lift the limit back to 75%.
For now, Nordic American Tankers’ 60% payout ratio is too high, and SafetyNet Pro penalizes the stock as a result.
More significant is that the company has a history of cutting the dividend. Nordic American Tankers slashed the dividend several times in the past 10 years. That kind of track record suggests management won’t hesitate to do it again when it deems necessary.
This year, the company has boosted the dividend significantly, from $0.10 last year to $0.45 this year. That gives the stock a robust 13.2% yield.
If Nordic American Tankers boosts its free cash flow in 2021, or if I raise my payout ratio limit back to 75%, the stock will likely get an upgrade.
Its history of cutting the dividend often won’t make it especially highly rated. But it should get a lift from the bottom of the ocean floor.
Dividend Safety Rating: F
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Source: Wealthy Retirement