Tsakos Energy Navigation: Dividend Bump For Common Stock (NYSE:TNP)

Introduction

I have been keeping track of the performance of Tsakos Energy Navigation (NYSE:TNP) for several years now, and I mainly focused on the company’s preferred shares as I bought the Series F preferred shares at a steep discount to par during the worst days of the COVID crisis. In the past few years, the company has been printing cash thanks to strong charter rates on the world markets, and its balance sheet has now gotten substantially stronger, making the common shares more interesting as they are trading at a discount of 35-40% to the book value while the market value of its vessels is likely higher than the book value.

Another strong quarter from Tsakos Energy Navigation – if you look through the impairment charges

The total revenue in the fourth quarter was approximately $220M, and although that’s a decrease from the in excess of $270M in the fourth quarter of the preceding year, the operating expenses decreased as well. Adjusted for the impairment charge, the operating income was approximately $83M compared to $122.4M in the fourth quarter of 2022.

And while that sounds like a big deal, it really isn’t. The total fleet size was approximately 10% smaller in the final quarter of 2023 and that obviously explains the lower revenue and operating income. Tsakos Energy Navigation has been rotating some assets and the temporarily smaller fleet will soon be expanded with eight newbuildings (seven are under construction, one is an option) of which four will be delivered in 2025. The fleet is now also quite a bit younger as the company recently sold nine vessels with an average age of 18.5 years and replaced them with 16 vessels with an average age of 1.3 years. As per the recent agreement to purchase five modern tankers, one new LR2 was delivered at the end of Q1 while the other four vessels that are part of the agreement will be delivered this quarter. As the charter rates remain strong, we should see the revenue and operating income pick up throughout the year.

Going back to the income statement, the company saw a small increase in its net interest expenses which increased from less than $20M to just over $23M. Very manageable indeed, and the net profit attributable to Tsakos Energy Navigation was $31.8M for the quarter. After making the $6.75M in preferred dividend payments, the net income attributable to the common shareholders of Tsakos Energy Navigation was $25M or $0.85 per share.

Keep in mind this includes a $26.4M impairment charge and the underlying net income was approximately twice as high. A good result overall, for sure.

And 2023 generally was a good year for Tsakos overall. The company reported a net profit attributable to its common shareholders of almost $267M despite the $26.4M impairment charge, but the FY 2023 result also included an $81M gain on the sale of vessels which provided a nice boost to the bottom line.

As the balance sheet is in an excellent shape with almost $380M in cash and a net debt of just under $1.2B versus the $2.6B book value of the assets, Tsakos’ management team thought it was a good idea to hike the quarterly dividend. The company doubled the dividend to $0.60 per share for the first semester, and if Tsakos pays a similar amount for the second half of the year, it would still have a payout ratio of less than 20%. The company also paid a special dividend in 2023 (for a total of$1/share in dividends), and I wouldn’t be surprised to see more special dividends as long as the charter rates remain strong.

Tsakos Energy’s preferred shares remain very interesting

As you may remember from my previous articles, I mainly focused on Tsakos’ preferred shares as the more senior ranking in the capital stack adds a layer of safety. I have owned the Series F preferred shares (NYSE:TNP.PR.F) for several years now. As mentioned in my previous article, those currently have a 9.5% preferred dividend which will become a floating dividend after July 2028 based on the three-month LIBOR +6.54%. This will undoubtedly be updated to the SOFR benchmark rate as it is the most likely reference rate but I can’t recall seeing official confirmation on this from Tsakos. In any case, we are still more than four years away from the reset date and we’ll know for sure closer to the reset date.

Meanwhile, the Series F preferred shares are trading at a pretty substantial premium to the $25 par value. The explanation is pretty simple: whereas most preferred shares have a reset feature kicking in five years after the issue date, in Tsakos’ case, the securities have a 10 year period of fixed preferred dividend rates. Anyone who buys the security now will still receive 4 years and 1 quarter of an annualized preferred dividend of $2.375 per share, paid in four equal quarterly tranches. This means the 6% capital loss – in the event of a call in 2028 – should be amortized over in excess of four years. And approaching the Series F preferred shares from a yield to call perspective, the yield to call still is a very respectable 7.8%.

Although a lot can happen between now and the summer of 2028, seeing the Series F preferred shares being called is a pretty likely scenario. Even if the 3 month SOFR drops to 3%, I can’t see Tsakos being willing to pay close to 10% on preferred capital. As the company’s financial health has substantially improved over the past few quarters and years, I doubt it would be hard for Tsakos to issue a new series of lower-yielding preferreds to retire the 9.5% yielders upon the first call date. Only if the short-term interest rates decrease to a rate that’s substantially lower than expected would it make sense for Tsakos to leave the securities outstanding until it makes more sense to call them.

The Series E preferred shares will start floating in May 2027 and as those floating preferred dividends will have a markup of 688.1 bp on the 3 month interest rate, it will likely serve as a litmus test to see what we can expect for the Series F preferred shares. The Series E offer a yield to call of approximately 7.85% which is in line with the anticipated return for the Series F preferred shares.

Investment thesis

Although I have mainly focused on the preferred shares until now, Tsakos’ balance sheet has been substantially derisked. The company has a very strong cash position and thanks to its long-term charter rates, it has a pretty good visibility on the incoming cash flows, reducing the risk to fund its newbuild program. Additionally, it looks like the book value per common share exceeded $40 at the end of 2023 and I expect this to be confirmed when the company files its annual report.

I have been writing (out of the money) put options on Tsakos Energy Navigation, but perhaps it’s time to consider re-initiating a long position in the common shares. I do have a long position in the preferred shares Series F where the yield to call remains pretty attractive.