Is ZIM’s Massive 27% Yield at Risk?

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Dividend hunters have a love affair with Zim Integrated Shipping Services (NYSE: ZIM).

The last dividend paid in April was $6.40 per share, which equaled a 27% yield. That wasn’t an annual number… That was the yield on the actual quarterly dividend. So you can understand why income investors are infatuated with this stock.

But then, as with most infatuations, reality sets in. That gorgeous girl you’re obsessed with comes with a whole lot of baggage (see last week’s Safety Net column for a real-life example). The car of your dreams that you just had to have needs a lot of repairs. And that 27% yielder stops paying a dividend.

That’s right. Zim didn’t cut its dividend. It omitted it.

Zim’s dividend is variable. The policy is to distribute 30% to 50% of net income to shareholders in dividends. In May, the company reported a net loss. No net income means no dividend.

As you can imagine, omitting the dividend leaves a mark on the dividend safety rating.

The shipping company is not projected to earn a quarterly profit again until the third quarter of next year.

Interestingly, free cash flow is projected to be substantial in 2023, coming in at $1.4 billion. If that winds up being the case, Zim could easily afford a dividend. However, its policy is based on net income, not free cash flow, so I wouldn’t count on it.

How does a company lose money but generate millions or even over a billion dollars in free cash flow?

In the first quarter of 2023, Zim lost $58 million. Included in the formula for profit and loss is depreciation.

When a company buys an asset, that asset depreciates over time. That depreciation is an expense that reduces profits. However, it does not represent cash that went out the door in that quarter or year. The cash was spent when the asset was purchased, but depreciation expense is taken over several years.

In Zim’s case, it had a $387 million depreciation expense in the most recent quarter. If we added that back to the $58 million loss, Zim would have been profitable by $329 million.

In the cash flow equation, we add back depreciation because it doesn’t represent cash that went out the door in that quarter or year. Add and subtract all of the other noncash items and include cash spent on capital expenditures, and Zim’s first quarter free cash flow totaled $138 million.

That’s a big difference from a loss of $58 million.

Zim’s dividend should be reinstated when management is confident it will turn a profit for the year – even though it could afford to pay one now.

But because the dividend is variable and based on fluctuating earnings in a volatile industry, it is practically guaranteed that once the dividend is reinstated, it will be reduced at some point after that.

Dividend Safety Rating: F

Dividend Grade Guide

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