At HK$92 billion market cap, Orient Overseas Container Line (OOIL) is one of the world’s largest container shipping operators.
It runs over 120 vessels with a combined capacity of about one million TEU. Essentially, they’re in the business of moving stuff around the globe, and lots of it.
TEU is shipping lingo for twenty-foot equivalent units – basically how many standard containers they can haul.
It’s also part of the powerful Ocean Alliance with COSCO, CMA CGM and Evergreen shipping. This dominates the global container shipping market.
Today, shares are trading at just 4.8x earnings. That means, if you bought one share of OOIL, you could get your capital back in less than five years if it stays where they are.
But here’s the big one: Shares are now trading at 10% dividend yield. And the question for me: is its dividends secured?
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First things first, why did OOIL’s shares crash?
OOIL shares are painful to watch. After peaking more than HK$280 in 2022, shares plunged by more than 66%. Back then, container shipping rates from China to the US plunged over 50%.
Then there’s the sharp reversal of a pandemic-driven boom in container shipping and sentiments soured.
The thing is, shipping is a cyclical game. Rates soar when supply is tight, then crash when capacity floods the market – or demand cools.
Yet, as I’m writing this, shares of OOIL have already surged close to 40% over the past year driven by a rebound in freight rates and global trade recovery. In fact, over the past five years, shares soared over 300%.
2024 financial performance was a surprise
Let’s look at the numbers for 2024:
- Total revenues grew 28% y/y to HK$10.7 billion
- Operating profits rose 85% y/y to HK$2.6 billion
- Net profits grew 88% y/y to HK$2.5 billion
This was due to higher freight rates from supply chain disruption, especially during the Red Sea crisis that have forced container ships to reroute around Africa instead of using the Suez Canal.
What’s more, global trade started to recover, which benefited the shipping giant.
The dividend story: generous yield with potential upside?
Here’s the real meat. Because of its impressive numbers last year, OOIL paid dividends of HK$15.20 per share, which translates to an attractive dividend yield of approximately 10% at current prices.
That’s a big bonus.
What if OOIL cuts dividends?
OOIL’s dividend history ain’t the best. Looking at OOIL’s dividend history, the company has varied dividend payouts.
It tends to be generous when times are good – like during the 2021-2022 boom and more conservative during tough times.
This is also a result of its more cyclical revenues and net profits.
My take is, even if dividends get cut by half, that’s still close to 6% yield. Not too bad. Especially for Hong Kong stocks.
In my view, that’s also a pretty huge margin of safety. What’s more, its current dividend payout is only a 20% payout ratio.
This means, it only pays out $20 dividends for every $100 of net profits it earns. That’s a comfortable payout ratio.
However, I’m not betting on a massive cut.
Instead, as the market sentiment and business performance improve, it is possible the payout ratio can go up. What’s more, OOIL has proven a well-run shipping operation can generate solid profits even when market conditions normalize.
But it’s not just good financial performance.
OOIL’s has a strong financial position
Unlike many shipping companies that are weighed down by high leverage, OOIL has virtually zero debt. What’s more, it maintains a strong cash position of ~US$8 billion. That’s almost half of its total assets.
At least, if the company dives back into the bottom of the shipping cycle, it has plenty of firepower to still expand and at the same time, maintain a modest dividend payout.
Here’s the big problem
Shipping is notoriously cyclical. It’s also driven by geopolitics. Despite a strong 2024 performance, the industry could face headwinds if global trade slows – recall Trump’s new tariff policies – or if too much supply enters the market.
What’s more, ongoing trade wars and sanctions can also disrupt shipping routes.
In fact, while shipping rates were good before, there are signs that it has started to fall over the past few quarters. This could affect OOIL’s shipping volumes.
Long-term growth still drives dividends
Going forward, OOIL still presents growth opportunities. With China being one of the biggest manufacturing and export hubs in the world, the long-term trend for OOIL is healthy.
As long as more and more goods are shipped out from the world’s second largest economy, OOIL can sit on its hands to collect profits.
Next, OOIL continues to expand. Recently, it took delivery of seven new large container vessels in 2024.
And chartered an additional six 13,000-TEU vessels. This ongoing fleet renewal is crucial for maintaining competitiveness and meeting increasingly strict environmental regulations.
Lastly, OOIL maintains its “Alliance Benefits”: Its participation in the Ocean Alliance gives its access to better route networks, more frequent sailings, and operational efficiencies that smaller independent operators simply can’t match.
My final thoughts
OOIL’s strong year-to-date performance suggests the market is starting to recognize the company’s value. However, I might not be convinced of its recent share price surge, considering how markets can be cyclical.
Having said that, at 4.8X PE ratio and shares trading at 10% yield OOIL is deep in the bargain bin. Even if dividends take a cut, it’s still collecting far more than what many other Hong Kong blue-chips pay.
Furthermore, dividends are secured by its fortress balance sheet with zero debt, a recent conservative payout ratio and could also see higher payout ratio in the future.
However, given the cyclical nature of the shipping industry, one should be prepared for volatility.
Hi Willie. Was intrigued by OOIL back in 2022 but didn’t pull the trigger. Maybe it’s time now.
Quick question, since it is a China company, is it correct that its dividend is subject to 10% withholding tax? Means of the 10% we will only receive 9% dividend in cash?
Hi EK!
OOIL is a HK-based and listed company on HKSE. Hence, there shouldn’t be any dividend tax for Singapore investor. But you still might want to check with your tax advisor depending on your country of residence.
Hope this helps!
Cheers,
Willie
Thanks Willie.