ZIM: A 99% Dividend Stock Offers a 100% Arbitrage Opportunity

-- What does a dividend yield of 99% mean? As long as the company maintains that level of dividend, after a year, you got this stock for free.

--What if you are afraid that the stock price will fall? Options can give you double insurance.

Fed has raised interest rates expectations for 2022 and 2023. The rate hike is a huge negative for the stock market, especially for those growth stocks that lack dividends and buybacks. Companies with high dividend and stable business will be more popular in the interest rate hike cycle.

1. ZIM can reach a 99% dividend yield

$ZIM Integrated Shipping Services Ltd.(ZIM)$ , listed in 2021, has paid out nearly $30 in dividends and has a dividend yield of 99%.(record high price of $68 and now fell to $27.）ZIM is an Israeli shipping company, and the company's market capitalization of $3.2 billion. Although it will only go public in 2021 (IPO price of $9.51), the company was founded in 1945.

Unlike traditional shipping companies, ZIM focuses on the "Niche Route" business, which is a customized shipping route based on customer needs.

In other words, they can choose "profitable and efficient" routes as much as possible within their carrying capacity, and thus operate in a relatively lightweight manner. This is why ZIM has performed so well during the pandemic.

• They can cut unprofitable operations as much as possible when the global shipping industry is in decline.
• They can also ramp up supply and thus generate explosive profits during a supply chain crisis.

As you can see, the performance of the past 12 months can be described as explosive, ZIM is benefit from deepening inflation and supply chain tension.

2. Dividends of $ 29.1 vs. Current Price of $27.14

The company has also paid massive dividends after making money, and in March this year actually paid a dividend of $17, reaching $29.1 since the IPO.

What does this mean?

• At the current price of $27.14, if you can get a dividend of $29 in the next year (even after deducting the dividend tax), dividends can fully recover the cost of investment, which means you get a ZIM share for free.

Can I get the $29 for sure?

There are also risks. The dividend in the next year can't be guranteed as the same as last year's.

3. ZIM dividend is expected to increase to 50% in the coming year

The amount of dividends paid by the company depends on profit. Many companies with long-term stable dividends have a foundation of long-term stable profits, and they can ensure a steady rise in dividends while maintaining a steady rise in profits.

Even if there are ups and downs in profits, they can still have enough cash assets to support the dividends. Besides REITs that have mandatory dividend requirements, the most typical ones are food and beverage stocks $Coca-Cola(KO)$ and tobacco companies $Altria(MO)$ , $British American Tobacco PLC(BTI)$ , etc.

ZIM's dividend history does not look stable as it's only listed for 2 years. The current dividend yield of 99% is likely to be the peak.

However, the company's management also said in the Q2 earnings call that

it would increase the dividend, adding to the previous 20% dividend payout ratio to more than 30%, or even 50%. This also gave many investors hope.

Looking at the dividend payout ratio (the ratio of dividends paid to current profits), ZIM's dividend payout ratio for the past 12 months is 52%.

The market currently expects ZIM's EPS to total $25.50 for the four quarters starting in Q3'22. If the company maintains a 50% dividend payout ratio, that dividend would also be $12.25, 45% of the current share price $27.

In other words, if ZIM's share price can still maintain $27 after one year, it will have 40% after-tax income just by taking this dividend.

4. Can share rise after paying dividend?

It's known that dividends aslo means ex-rights. If you take away $10 from $27, the value will be removed directly from the stock price. Therefore, when we look at the amount of dividends, we should also look at the ability to "fill" the rights.

After paying dividend, the share price will fal, which will lower the P/E ratio of the company and attract more investors to invest.

ZIM although unlike other large companies with tens of billions of market cap, a variety of investment banks, hedge funds, pension funds and other big guys hold this stock. For example, Soros buy the shares when it went public.

Although Soros have liquidated his positions in Q2 this year, there are still bigwigs such as Jim Simons and Jeremy Grantham who continue to hold. At current prices, some of them may have started to have float losses, but it may not be an opportunity for investors. And the lower share price and lower valuation after the dividend will also attract more investors.

5. Options strategy to hedge against the decline in ZIM's share price

I personally think ZIM business may be "back to normal" after the explosive growth, but will not plummet.

So for $ZIM Integrated Shipping Services Ltd.(ZIM)$ , the biggest hidden problem is the economic recession, which will certainly lead to further shrinkage of the freight industry and activities.

We can see from the Baltic Dry Index (BDI) after Q1 this year. With the supply chain problems improve, shipping activity decline, and recession is expected to increase, there is the possibility of further decline.

Also, I compare ZIM share price to BDI. They are positively correlated most of the time, with occasional negative correlations correcting within two months. From this perspective, this divergence after September this year is also likely to be corrected in the next 1-2 months.

As to whether it will continue to rise significantly, I am not sure.

But there is a factor that could bring some good news---- gas transportation.

Winter is coming, Europe needs to import gas from distant places. $ZIM Integrated Shipping Services Ltd.(ZIM)$ has signed a 10-year shipping agreement with $Royal Dutch Shell PLC(RDS.A)$ of more than 1 billion dollars.

If ZIM prices still continue to fall, we can use options strategy. Option striking price will not change because of the dividend, but will reflect on the option price.

Investors can use "in-the-money covered options". If the dividend is paid at the end of November, you can sell an in-the-money option at December, even if it is very deep in-the-money, it does not matter. You may miss the potential gain in share price, but in exchange get a solid dividend income.

To summarize

1. ZIM the company has a very flexible shipping business, more stable than the general shipping company earnings.
2. ZIM has a history of high dividends and the expectation of high dividends, which can largely enhance investment returns.
3. Investors can also sell covered call options in advance to lock in returns.