Shipping company ZIM Integrated (NYSE: ZIM) is used to delivering things in bulk. Lately it has been delivering cash to shareholders in bulk too. The current ZIM Integrated dividend yield is an incredible 106%.
In other words, if I bought shares today and the dividend is maintained at its level of the past 12 months, I would have recouped more than the cost of my shares a year from now – and still own them!
At face value, that sounds too good to be true. What is going on with the ZIM Integrated dividend – and does it make sense to add the company into my portfolio now?
Look to the future
Although the yield is 106%, that is based on the payouts over the past year, including a monster dividend in March.
Since then, the dividends have been more modest. They still add up, though. On Monday, for example, ZIM goes ex-dividend for a quarterly payout of $2.95 per share.
That alone is around 11.5% of the current share price. On an annualised basis, that would equate to a yield close to 45%. While it is far below 106%, that would still be a huge yield!
But past performance is no guarantee of what happens next. As an investor, I have found to my cost before now that that is especially true when it comes to the shipping industry. High freight rates create large profits, but that leads to a rush to build new ships. Once they are in service, capacity mushrooms and rates fall dramatically. The timing of each cycle may vary, but ultimately freight shipping is a highly cyclical business.
What comes next
Freight rates have been heading down from their recent highs. I think that will hurt profits at shipping lines like ZIM.
In its most recent trading update, the company’s chief executive told the market that, “the near-term outlook for container shipping has shifted and the normalization in freight rates has begun”. In other words, rates are sliding.
The company also reduced its forecast for full-year adjusted earnings before interest, tax, depreciation, and amortisation. It is still expected to be a record, but cutting the annual forecast nine months into the year suggests that freight rates may be falling faster than ZIM expected.
The ZIM Integrated dividend policy is to pay out 30% of net income as a dividend each quarter. So, as income looks set to fall, I expect the dividend to follow. If rates stabilise, though, the large dividend could be maintained.
My move
Does that mean that this might not be a good income option for my portfolio? Not necessarily. After all, the current yield is so high that even if it fell substantially, ZIM could still be a lucrative investment for me.
However, I have no plans to buy the shares. Shipping is too cyclical for my tastes as a shareholder. If freight rates collapse, the ZIM Integrated dividend could follow and its share price may also tumble. It has more than halved in the past year.
