ZIM Integrated: Last Dividend Paid, Now What

On April 3, ZIM Integrated Shipping Services (NYSE:ZIM) paid a large dividend to shareholders. As expected, the stock fell to offset the dividend payout, though the amount didn’t originally match the large dividend as forecast. My investment thesis remains Bearish on the stock with shareholders not fully appreciating the lack of dividends in the next few years ahead.

End Of Material Dividends

A lot of people have got stuck on whether ZIM will pay dividends in the years ahead. The key is whether the company pays material enough dividends to warrant owning the stock above $17.

ZIM paid the following large dividends for the profits earned during 2022.

The problem is that shipping indexes continue to plunge. The Drewry Index is down another 4% in the couple of weeks since last reporting on the metric. The March 16 shipping rate for a 40ft container was $1,790 and has already dipped to only $1,717 for March 30.

The financial picture for ZIM has definitely deteriorated for their business in the last few weeks. Remember, management predicted shipping rates were set to bottom and rebound this year, yet the flood of newbuilds to the market remains detrimental to shipping rates as the progresses.

Analysts continue to cut EPS targets for the next few years. The predicted losses now amount to $7.17 over the next 3 years and some analysts are clearly predicting much larger losses over the period.

With 120 million shares outstanding, this amounts to a combined loss of $860 million. The loss is sizable for a stock still trading at $17+.

The odds of ZIM paying a dividend over the next few years appear next to zero. Of course, the container shipping company could squeeze out a profit in one of the shoulder quarters and pay a small dividend. Either way, the dividend yield won’t warrant a $17 stock price.

Survivor

Right now, ZIM does have a strong balance sheet. The stock is definitely holding up due to the cash and investments balance of ~$3.8 billion after the large $769 million dividend payout for the Q4'22 dividend and the true-up for the rest of 2022.

ZIM has ~$32 per share cash entering this weak container shipping market. The shipping company has an equity value of $5.9 billion amounting to nearly $49 in equity value, though the amount dips to $42 after paying the recent Q4'22 dividends. Also, the vessel and container handling equipment combining for $5.7 billion in value could get written down in this environment.

The company will be a survivor and can potentially use the strong balance sheet to snap up assets on weakness. On the Q4'22 earnings call, CFO Xavier Destriau was clear on this opportunity:

We will continue to renew our container fleet and we continue to explore inorganic growth to the potential acquisition of regional liners in key market, such as Southeast Asia or Latin America.

These data points definitely make one want to be constructive on the stock prospects in the next year or so after the peak of the losses pass. The key here is to not remain blindly bullish when the market is likely pounded with quarter after quarter of losses for several years.

A lot of investors are still used to getting large quarterly dividend payouts. As quarterly losses mount and dividend payouts don't occur, the stock is likely to trade lower no matter the remaining equity value.

Takeaway

The key investor takeaway is the ZIM just paid the last major dividend for this cycle. The container shipping company has the balance sheet to survive a long downturn, but the stock isn't appealing at $17.

Too many investors are still holding on to ZIM hoping management's guidance for 2023 EBIT of at least $100 million turns out accurate. Even this best case scenario leads to limited profits and only a small dividend while the worst case is massive losses for years and no dividend payouts.

Investors should just sell the stock and look for a better entry a few years from now when the market is more in balance with supply and demand.

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