If you are looking at the ultra-high 111% dividend payout for Zim Integrated Shipping (NYSE: ZIM) and thinking, “This is too good to be true,” you're right. There are factors at play in this yield within Zim Integrated Shipping Services stock that makes it meaningless to investors but not unattractive once you boil it down to its essence. The No. 1 takeaway from the yield, however, is the company has a managed distribution plan that says it will pay 30% of earnings in dividends. The recent payouts are due in large part to the pandemic-boosted business.
Analysts Are "Holding" Zim Integrated Shipping
The analysts are "holding" Zim Integrated Shipping because it still pays a high dividend even with the decline in payments seen over the last few. The six analysts with current ratings have it pegged at a firm "hold" but this is down from a much stronger "hold" earlier in the year. You can blame a slowdown in business attributed to a peak in pricing and a slowdown in volume growth. Despite this, the company is forecasting revenue growth for the year and it could easily outpace the forecast given the strength posted by names like Ford NYSE: F and General Motors NYSE: GM which are heavily dependent on the global supply chain.
The "hold" rating is amplified by a price target that screams "buy" more than it says "hold." The consensus target, which is down in the 12-, three- and one-month comparisons, is still more than 75% above the recent price action and even the low price target offers some upside for investors. The low price target is the most recent set put in place by Jefferies and may mark the low point for the company as it trades at a deep discount to its earnings potential.
Zim Integrated Shipping trades at less than 0.75x its earnings which is a very deep discount relative to any comparison commonly used by the market. Even its peers, which trade at deep discounts, are valued at a rate 4x higher which suggests a rebound in the price action is due or perhaps overdue. Looking forward, the valuation relative to next year’s consensus expectations is more in line with peers like Star Bulk Carriers and Matson but the consensus figures may underestimate the company’s earnings power.
Zim Integrated Shipping Raises its Dividend Outlook
Zim Integrated Shipping raised its dividend outlook when it issued the second quarter earnings report in August. This has the quarterly payout for the first three quarters of the year (up to 30% of earnings from 20%) and will have the final annual payout in December up to almost 50% of earnings, including the prior payment. Based on the results and payouts in the first half of the year, the payouts in the second half of the year could top $22 or almost 100% of the current share price. Looking out to next year, assuming the analysts are correct in their earnings forecasting, the payout could fall to as little as $4 annually, which is still a robust 16% yield. The risk for investors is that share prices will continue to trend lower.
The Technical Outlook: Zim Integrated Shipping Sinks to the Bottom
Shares of Zim are in a downtrend and they may move lower. There is a factor that may indicate a bottom. The valuation relative to next year’s earnings is in line with peers and may keep the price from moving lower, assuming the outlook does not also move lower. In this light, price action may be indicating a bottom at $23 but it is too soon to call it confirmed. The company will next report earnings on November 16 and may move the market at that time.
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