GSL: A 6.5% Yield That May Not Be As Bad As It Looks

Investors love shipping stocks these days because of their robust dividends. And with supplies constrained around the globe, marine shipping companies are able to charge higher prices to boost both their cash flows and the dividends they pay to shareholders.

London-based Global Ship Lease (NYSE: GSL) owns 65 container ships that are used to ship goods worldwide.

The company recently raised its quarterly dividend to $0.375 per share or $1.50 on an annual basis. That gives Global Ship Lease an attractive 6.5% yield.

But can the company maintain such a high yield? The data suggests it can’t… but there’s a key element that may save investors from a cut…

Free cash flow, which had been positive for several years, swung into the negative column in 2021 in a big way – from $77 million in 2020 to -$204 million in 2021.

However, in 2022, free cash flow is forecast to boom – estimates have it coming in at $314 million. Global Ship Lease recorded $50 million in free cash flow in the first quarter of this year.

Chart: Plugging Global Ship Lease's Free Cash Flow Leak

But that negative free cash flow number from 2021 is a big warning shot across the bow for dividend investors, and it takes the dividend safety rating down a few notches.

Another factor tanking the dividend’s safety rating is the five years the company did not pay a dividend between the beginning of 2016 and May 2021. We know that when the going gets tough, Global Ship Lease stops paying dividends. And keep in mind, the company was free cash flow positive for several years prior to reinstating its dividend.

Negative free cash flow last year and the earlier suspension of its dividend mean that Global Ship Lease receives the lowest rating from Safety Net – an “F.”

However, Global Ship Lease does have one thing working in its favor. Management stated that the company’s contracts with customers provide visibility into its cash flows over the medium term. Global Ship Lease said the average remaining term on its contracts is 2.4 years.

So it is possible that the company will be able to maintain its dividend despite its low Safety Net rating. That said, if there are any changes to Global Ship Lease’s contracts, its customers stop paying, or its contracted revenue doesn’t come in as expected, a dividend cut is very likely given the company’s history.

Dividend Safety Rating: F

Dividend Grade Guide

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