High-Yield Danaos Corporation Is About To Set Sail

Key Points

• Danaos Corporation had a robust quarter and exceeded consensus on the top and bottom lines. 
• The cash-generating machine pays more than 5.0% yield at these price points. 
• Analysts and institutions are nibbling on the name, which may help drive it higher in 2023. 

Danaos Corporation NYSE: DAC is not an exciting investment unless you like cash-generating machines that pay high-yielding dividends. The company is one of the world’s largest independent container ship operators, and the business is good despite macro-uncertainty gripping the economy. The Q1 results prove the company’s strategy is working, one of modernization and efficiency. The detail that income investors would like to know is that this stock yields over 5% at the current payout rate, and it is among the safest-looking payouts on Wall Street. 

Danaos Corporation is paying out only 8% of its 2023 earnings consensus and blew that consensus target out of the water with its Q1 results. The stock is also trading at a ridiculously low 2.3X its earnings, making it a cheap 5% to own. The company has only been around for a few years. Still, it is gaining traction with business and dividends and may be expected to increase the distribution again (there’s been 1 distribution increase since the IPO). 

Danaos Has Smooth Sailing In Q1

Danaos had a mixed quarter relative to last year, but there is a 1-off factor impacting the bottom line comparisons. Last year, the company held a position in ZIM that paid a dividend accounting for nearly half of the quarterly adjusted earrings. That aside, Danaos produced nothing but growth, and the rest of the year looks like smooth sailing. The company reported $243.6 million in revenue for a gain of 6.0% compared to last year. This is down sequentially but ahead of the Marketbeat.com consensus and is compounded by a robust margin. 

The margin news is also mixed. GAAP and adjusted EPS are down compared to last year but include the ZIM dividend. After backing that out, the adjusted EPS of $7.14 is up 18% compared to last year and beat the consensus estimate by an even wider margin. This left the balance sheet solid, with long-term debt roughly halved compared to last year, lease debt non-existent, and the cash balance up.

The company did not give formal guidance, but it shows clear momentum and favorable metrics. The company reports $380 million worth of new multi-year contracts signed this quarter and a charter rate running above 97%. 2024 is also shaping to be a strong year; the charter rate is running near 73% and should rise to rival the 2023 level. 

Sell-Side Interest Helps Danaos Bottom 

The sell-side interest in Danaos Corporation is light but bullish. There are only 2 analysts with current ratings, but they rate the stock a Buy with a price target about 18% above the current action. The most recent target is from Jeffries and was posted in February- they see the stock trading near $80. The institutions also nibble on the name and own about 19% of the stock. They were buying on balance throughout 2022 but turned bullish in Q1 of this year. If that develops into a multi-quarter trend, it could cap gains until later. 

The chart is promising. The post-release action has the stock up to a new multi-month high, attempting to break above resistance. If the market can get above $63 and stay there, it could continue to trend higher. If not, this market will remain range bound until later in the year. Either way, the dividend appears reliable.