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Zim Is Undervalued Despite an Astounding Payout Record

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Zim Integrated Shipping Services Ltd. (NYSE:ZIM) is a global shipping company with a diversified fleet of vessels. The company operates in all major trades, including containers, dry bulk and crude oil. It has a solid balance sheet and generates healthy cash flow.

Despite being a well-established company with a strong track record of profitability, its shares are trading at a deep discount to intrinsic value. As a result, Zim could be an extremely attractive opportunity for value investors.


Zim Is Undervalued Despite an Astounding Payout Record
Zim Is Undervalued Despite an Astounding Payout Record

The dividend is not in trouble

Zim offers a wide range of services, including container shipping, dry cargo shipping and reefer shipping. The company has a strong network of vessels and terminals, providing reliable and efficient customer service. It also offers value-added services, such as container maintenance and repair, cargo tracking and port clearance. In addition, it provides a wide range of data and analytics to its customers, which helps them optimize their supply chains.

Investors can largely thank higher freight bids for Zim's recent good performance. Management deserves credit for staying the course, but the rebound in freight rates has boosted the company's free cash flow. Container freight rates dramatically increased over the past several years, spiking in September 2021 at nearly $10,400. Since then, global freight rates have been stabilizing but remain elevated. In June 2022, the global freight rate index stood at almost $7,100.

For Zim, the average twenty-foot equivalent unit was $3,596 in the second quarter of 2022 versus $2,341 a year ago.

Due to the positive momentum, net income for the year's first half came in at a very healthy $3.05 billion, a 50% uptick versus $1.48 billion in the prior-year period. Zim confirmed the guidance for the fiscal year of $6.7 billion in earnings before interest and taxes could be possible.

With business booming, Zim wants to reward its shareholders with up to 50% of its annual net income and 30% of its quarterly earnings, which is quite a generous offer in this hostile environment.

At 104.04%, Zim also offers one of the highest dividend yields in the market. Invstors can thank the depressed stock price and the handsome dividend payments for that. As a result, investors have been patient despite the stock not doing well. It is hard to deny the macroeconomic environment has been volatile recently, but soon it will be time to reap the benefits.

Meanwhile, investors will be happy with the generous payouts. In August, the Israeli international cargo shipping company declared a quarterly dividend of $4.75 per share, which was 30% of second quarter 2022 net income, plus an additional 10% from last quarter.

The company's strong financial position allows it the flexibility to maintain its current dividend policy even if earnings decline. Zim's dividend policy is sustainable, so investors should not be concerned about its ability to keep paying dividends at the current rate.

A global recession could put a spanner in the works

Zim Integrated Shipping is one of the world's leading shipping companies and has made great strides in recent years. With 149 vessels and very little debt on its balance sheet, things are looking great for the company. However, there is always a risk that things might move in the wrong direction if freight rates decline. This would be a major blow to the company, reducing the demand for its services and putting pressure on its bottom line.

A drop in shipping rates is possible if a global recession occurs. Trade is lower during a recession, which negatively affects the world economy. With falling demand for goods and services, it also becomes harder to make shipping viable economically. This results in lower shipping rates as carriers compete for business. A global recession can also lead to an increase in maritime piracy as shipowners look to cut costs by sailing through areas known for piracy.

Furthermore, a global recession may cause some countries to default on their debt payments, leading to a decrease in the value of their currency. This would make it more expensive for carriers to ship goods to these countries. As a result, a global recession could significantly impact the shipping industry, causing rates to decline and increasing piracy and currency volatility.

Despite being one of the world's largest shipping companies and maintaining a dividend for years, Zim could suffer immense financial losses if a global recession were to occur. Its business heavily depends on global trade, so a recession would lead to a sharp decline in demand for its services. In addition, the company would likely suffer from increased competition from other shipping companies as they attempt to survive the downturn. As a result, Zim's dividend would likely be cut. This would be a devastating blow to shareholders, who have come to rely on the high dividend payments.

While it is not set in stone that a global recession will occur, investors should be aware of the situation and make adjustments as necessary.

Takeaway

Zim's prospects as an income investment are appealing. The company has virtually no debt and a strong business model, which will help it maintain its healthy dividend. Its dividend yield is higher than the industry's average and its regular dividend hikes are proof of management's commitment to shareholders.

In addition, Zim's stock price is currently trading at a discount to its book value, which makes it an attractive investment for value investors. Overall, the company appears to have a solid business model and a strong dividend that is attractively priced.

This article first appeared on GuruFocus.