Shipping giant Clarkson (LSE: CKN) has a long record of dividend growth. I fear, though, this could come crashing down before long. News in recent days has intensified my concerns too.
It hasn’t decided to axe dividends entirely. Late last month, it advised it would “defer the decision on the amount and timing of the [final] dividend until later in the year once the impact of Covid-19 on maritime markets and [our] business becomes clearer.”
Worrying news
I’m not particularly hopeful any final payout for 2019 will eventually be paid. The shipping industry is sinking as global lockdowns smash trade. It’s why maritime research body Sea-Intelligence told the BBC ship journeys could topple around 25% in the first half of 2020.
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For the whole year, Sea-Intelligence expects journeys to drop 10% year-on-year. And this, coupled with the possibility of slumping shipping rates, could create a perfect storm for the likes of Clarkson.
Should rates also fall at the same level as they did following the 2008/2009 banking crisis (by 20%), and sailing volumes remain around 10% lower, operating losses of up to $23bn could materialise, the organisation estimates.
To put this into context, Sea-Intelligence says: “That would wipe out the shipping firms’ last eight years’ worth of profits.”
Prolonged pain
Dividend growth hero Clarkson has raised annual payouts every year for more than a decade and a half on the spin. But I fear the coronavirus outbreak could put this proud record to the sword.
It’s not just the threat of overspill into the second half of the year. Some parts of Europe are lifting lockdowns and the US could be on the brink of easing its own restrictive measures. But rising global infection rates mean governments could soon back-peddle on attempts to lift quarantine measures.
It’s the likes of Clarkson that also have to fear the consequences of a deep and lasting recession when the coronavirus crisis begins to recede. International Monetary Fund forecasts yesterday suggested a sharp decline in the world economy this year and just a modest recovery in 2021 too.
Dividend growth to fall?
There’s also plenty of worrying signals for Clarkson’s broking services. The Baltic Dry Index was sinking even before the Covid-19 outbreak hit global trade. It’s fallen 70% since last September.
Aside from the rising pressure on its dry cargo and container operations, weak energy demand threatens to smack the profits it generates from tankers and liquid natural gas carriers. Painful and prolonged crude price weakness casts a cloud over its offshore broking services as well.
City analysts expect Clarkson to endure a 12% earnings drop in 2020. However, they expect the business to rebound in 2021 and record a 21% bottom-line rise. The chances of both forecasts being hacked down as the year progresses are high and rising, in my opinion.
I think it’s just a matter of time before the business bites the bullet and stops growing dividends as heavy profits pressure sets in.
