Clarkson's dividend looks safe despite stormy waters

There can’t be too many public companies in the UK that can boast 20 years of consecutive dividend growth. Yet that’s exactly what shipbroker Clarkson (CKN) has achieved despite, variously, a freight market boom, a record high shipyard output, and a lengthy global shipping recession. Beyond these contrasting factors, the global shipping industry also had to contend with diverse growth rates between emerging market and developing economies and the increasing influence of private equity funds in ship financing – all this against a backdrop of tightening environmental regulation. And, lest we forget, we are also witnessing a profound rebalancing of China’s economy towards a more consumption-led growth model – that’s the theory at any rate.

You’re left with the impression that shipbrokers have needed to be appreciably more adept at changing course than the vessels they represent. Clarkson’s adaptability has rarely been in question, but it certainly hasn’t been immune to the evolving challenges, nor to the inherently cyclical nature of the industry.

Therefore, in 2022, the shipbroker's performance was hobbled to a degree by China’s extended zero-Covid strategy and the related port congestion issues. There was also the small matter of Russia’s invasion of Ukraine and the consequent hit to dry bulk cargo volumes. But perhaps the determination of central banks to constrict liquidity in the global economy placed the greatest strain on the industry. With aggregate demand in retreat, investors took fright after a couple of years of excess profits. This is undoubtedly reflected in the 22 per cent drop in Clarkson’s share price over the past 12 months, although you would be hard-pressed to justify the contraction based on its interim numbers.

Group chief executive Andi Case outlined the contrasting influences on seaborne trade, noting that “after contracting marginally in 2022, overall global trade during the year to date has reverted to growth, with help from China's reopening, although the macroeconomic backdrop remains fragile”. That fragility is still in evidence, and the group has experienced softening rates in some sectors, but Clarkson managed to drive underlying earnings by 35 per cent at the half-year mark to 134p. Case went on to say that prospects are looking brighter due to “annualised growth in trade volumes with further support for demand and freight rates coming from the increased tonne-mile impact of changing trade patterns arising from geopolitical tension”.

Case’s relatively upbeat assessment stands in contrast to the latest market update from AP Møller-Maersk (DK:MAERSK-B). Although the Danish shipping giant’s second-quarter performance trumped analyst expectations and prompted upwardly revised Ebitda guidance for 2023, the group also warned that the general fall in economic activity will lead to a prolonged downturn in container demand as companies cut back on inventories in response to faltering trade volumes. This follows on from a two-year period of restocking in the aftermath of the pandemic lockdowns.

Møller-Maersk’s warning is also borne out in the accompanying chart covering the Shanghai containerised freight rate. And it also chimes with Allianz Global’s Safety and Shipping Review for 2023. The Allianz analysts note that the cost of shipping a container between Asia and the US or Europe has cratered since last year, while some routes are now at pre-pandemic levels. Admittedly, these were boom years for the global shipping industry, but with the global container fleet expected to grow by 6.3 per cent this year and by 8.1 per cent in 2024, we can expect that excess capacity will be a feature of the market going forward, although the degree to which this will influence shipping rates is difficult to gauge.

Back in 2016, Clarkson’s financial performance was under strain due to reduced activity in its financial division, but the business is faring much better in 2023 with reported first-half profits of £5.0mn on revenue of £26.5mn compared with a profit of £5.7m on revenue of £27.6m in the same period last year. More importantly, the group’s broking activities continue to gather momentum, while the “supply/demand fundamentals continue to look encouraging”. So, despite Møller-Maersk’s Nordic doom-mongering, we shouldn’t rule out a 21st year of increased distributions.