What's The Deal With Dry Bulk Shipping Stocks And Reverse Splits?

After a rough couple of years for dry bulk shipping stocks, a handful of companies have been forced to issue reverse stock splits to help keep their stocks and their companies afloat. Most of the reverse splits have been followed by heavy selling pressure, but the most recent reverse split by Diana Containerships Inc DCIX has been well-received by the market so far.

Despite a 20-percent drop on Wednesday morning, Diana stock is up 419 percent since it issued a 1-for-7 reverse split on Nov. 2. However, the latest reverse split is one of many for Diana since mid-2016, and the overall results haven't been pretty. Since June 9, 2016, Diana has issued five reverse splits at an overall ratio of 1-for-7056. In that time, the stock’s adjusted share price has crashed more than 99.9 percent.

Other Shippers

Diana isn’t alone in issuing a parade of reverse splits in an effort to maintain listings and raise much-needed cash. Since the beginning of 2016, TOP SHIPS Inc TOPS has issued a total of five reverse splits at a combined ratio of 1-for-180,000. Like Diana, the stock’s split adjusted share price is down more than 99.9 percent in that time.

Perhaps the most highly-publicized stock in the space has been DryShips Inc. DRYS because of its wild short-term short squeezes and market swings. Since March 2016, DryShips has issued eight reverse splits at a combined ratio of 1-for-11.76 million. Not surprisingly, the stock is also down more than 99.9 percent overall in that time.

Why Would A Company Reverse Split?

Reverse splits are often a last-ditch effort for a company with nothing left to lose, including its reputation. The NYSE and Nasdaq exchanges require minimum listing prices of $1. Beyond mainaining their listings, stocks with share prices below $1 are seen by many traders as junk investments and dead-end companies.

In Diana's specific case, all the reverse splits have been related to a $150 securities purchase agreement with Kalani Investments. As Kalani has received its shares by exercising warrants, they've been dumping them into the open market, diluting other shareholders and driving the share price lower. This process of issuing convertable debt at steep discounts and then reverse-splitting the stock after the debt holders sell their shares short is often referred to as death-spiral financing. As the name implies, the process tends to repeat itself, and it's not good news for investors.

In fact, regardless of the reason the company gives, reverse splits are rarely a good sign for shareholders. Long-term investors should especially be very careful about taking a stake in any stock following a reverse split.

Related Links:

5 Dry Bulk Shipping Stocks Moving In Sympathy With Diana's Outsized Move

DryShips: Clear Sailing Or Will It Sink Again?