A 10% Yield Sure To Be Cut

NAO

I’ve been writing the Safety Net column for more than three years. I’ve never seen a stock that was as much of a lock for a dividend cut as the one I’m covering this week.

Nordic American Offshore (NYSE: NAO) is a microcap stock with a market cap of just $110 million. It trades a little over 100,000 shares per day.

Nordic American owns and operates platform vessels in the North Sea. Given that the company is heavily tied to the oil industry, it’s no surprise that its stock has been cut by more than half over the past year.

Now, with a yield of 9.8%, some investors may be interested in trying to nab that fat, nearly double-digit dividend yield.

If you’re one of those people, don’t expect to have that yield for long.

First of all, the company doesn’t generate enough cash to pay its dividend. It never has. In fact, it doesn’t generate any cash.

In 2015, cash flow from operations was $6 million. But capital expenditures totaled $63.5 million, so free cash flow was negative $57.5 million. Free cash flow was also negative in 2014 and 2013. The company has been around since only 2013.

So in its brief history, Nordic American Offshore has never generated any free cash flow. It has burned cash every year. That’s a concern – especially because oil prices were over $100 two years ago, yet the company was still unable to create free cash flow at that time.

So without free cash flow, where does the dividend come from? At the end of 2015, the company had only $5.3 million in cash. My guess is the dividend will come from debt.

Nordic American Offshore has $47 million in long-term debt, but has $280 million in shareholders’ equity for a fairly low debt-to-equity ratio of 17%. So the company could go to the debt markets (if anyone will lend to it) in order to obtain cash to run its business and pay the dividend. But that’s not how you want your dividend to get paid.

And then there’s its dividend history.

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