There’s nothing like a big fat dividend yield. We all like getting more money from our investments. So when a stock is paying an insane 115% yield, some investors begin to salivate profusely. But when the stock is DryShips Inc. (NASDAQ:DRYS), it’s time wipe your drool and get the heck away.
As one of the most heavily indebted of the shippers, DRYS stock floated around in penny-stock territory after the recession and was constantly considered a bankruptcy candidate.
However, management at DRYS continues to pull the wool over investor’s eyes. A reverse split here, a reverse split there, add some share dilution and the promise of a big fat dividend is all smoke and mirrors.
Don’t be fooled. This is one rich dividend yield that will have you feeling much poorer in the end.
DRYS Stock Tale of Woe
Travel back in time to before the recession and you’ll see a very different picture for DryShips. China was feasting on commodities by the ton, and as one of the biggest names in dry-bulk and container shipping, DryShips was at the top of its game.
And then the bottom fell out. DRYS stock plunged under the weight of its heavy debt load and the commodities crash. This brings us to today.
Since the end of 2016, DryShips management has continued to boost themselves via various pieces of financial engineering. This has included plenty of debt-for-equity swaps and stock sales. DryShips has continued to partner with Kalani Investments on deals to help pay down its massive debts. The deals with Kalani have been the same — the investment group has been allowed to buy $200 million worth of stock over a 24-month period. And it has in spades.
That’s lead to shareholder dilution on a massive scale. The irony is that just a few months ago, DRYS stock underwent several reverse splits to stop its falling share price and delisting notices.
And while the purpose of the original plans for the cash was debt reduction — and to its credit, DryShips has reduced its mega-debt — it’s decided to use the cash for building out its fleet once again. And again. And again.
Needless to say, traders and investors in DRYS stock haven’t been too pleased with these turn of events. Shares of DryShips have once again continued to plunge on the back of share dilution and the buying of ships that really aren’t needed in the current shipping environment. While commodity prices have risen and China has started buying, the world is still awash in cargo vessels.
With its share price falling into the abyss once again, DryShips decided to pull out another trick to make shareholders happy. It started paying a dividend. The shipper decided to hand out a fixed $2.5 million to shareholders every quarter, regardless of how many shares outstanding.
The problem here is every time DryShips sells more shares to Kalani or others, that $2.5 million now gets spread over more investors. You actually get less money per share since there are more shares. How do you think shareholders reacted to this?
DryShips Seventh Reverse Split & 100%-Plus Yield
Naturally, DRYS stock has continued its death spiral. So much so, that back in May the firm completed a 1-for-7 reverse split. Only to be forced to split once again. The shipper announced that it would undergo another 1-for-5 reverse stock split this June.
As the stock has tanked, DRYS yield has exploded. Today, you can snag shares of DryShips with an insanely high 115% dividend. But I wouldn’t touch it with a ten-foot pole. Nor should you.
The only thing that DryShips management knows how to do is destroy shareholder value. The firm has continued to sell equity at any price to buy vessels that aren’t really needed in the current market environment. It’s then done nothing but use financial engineering to prop up its share price via the splits. It’s repeated the cycle multiple times and I would guess that it will continue. Kalani still has about 120 million to go on their latest purchase agreement.
For investors, this I exactly the opposite of what a firm focusing on its shareholders would do. That high dividend yield is really just an illusion to keep sucking them in and keeping the share price from delisting into the abyss.
The bottom line on DryShips: Stay the heck away from DRYS stock!
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.