To The Moon

• 3.8% Dividend Yield.

• DAC has 15 new methanol-fueled container ships under construction, all pre-contracted upon delivery, representing 27.2% capacity expansion set to fuel growth.

• DAC operates an 84-ship fleet with 471,500 Twenty Foot Equivalent (TEUs) of containerized capacity and 1,760,861 DWT of dry-bulk capacity.

• Excluding new ship construction capex, DAC generated $572.4 million in trailing twelve-month free cash flow.

• The company has 99% of operating days contracted through 2025 and 85% through 2026 giving the company great visibility.

Investment Thesis

$Danaos(DAC)$ is a tonnage-provider and non-operating owner of container ships and dry-bulk ships. Across its 84-ship fleet it has 471,500 TEUs of containerized capacity and 1,760,861 DWT (dry weight tons) of dry-bulk capacity. A standard shipping container is 1 TEU. DAC is expanding its fleet with 15 new methanol-fueled container ships in the under 12,000 TEU category, a segment which has a high average age. We expect that the under 12,000 TEU segment will see elevated scrapping activity as environmental regulations begin to weigh on operators.

While the broader shipping industry is entering a slowdown from oversupply and a weakening demand environment, DAC has an industry-low debt to EBITDA of 0.4x and an attractive 3.8% dividend yield. Even in a 2016-style meltdown of the industry, we believe that DAC is well equipped to weather the market downturn, and be in an advantageous position during the upcycle.

Estimated Fair Value

EFV (Estimated Fair Value) = EFY26 EPS (Earnings Per Share) times P/E (Price/EPS)

EFV = E26 EPS X P/E = $27.00 X 6.3 = $170.10

While DAC will likely have some earnings pressure in 2027 due to the delivery of several new ships and a downturn in the shipping market, we believe that it has strong free cash generation that provides long-term earnings power.

Containerized Freight

The global container shipping industry has begun to turn over into an oversupply imbalance as new builds are being delivered faster than demand. DHL is projecting an annual supply growth of 4.4% to 2028, while demand is only set to increase 3.3% annually.

The downside’s largest risk is tariffs, with 2025 projections initially showing flat to slight growth in containerized volumes, now showing a 1.1% contraction according to Fitch. The Red Sea and associated disruptions effectively reduced fleet size by 7-9% as ships had to take the long way around. A decrease in the number of ships going around the cape would meaningfully increase fleet capacity and drive down rates further.

On the upside, emissions regulations have limited the speed at which older ships can sail. While the specific impacts of this are difficult to determine, it could alleviate at least some pressure, with BIMCO projecting a 2% reduction in freight traffic speed during 2025. What we believe will be a major tailwind going into a down cycle is the average age of ships. Ships under 12,000 TEUs average 15.1 years old, with those over 12,000 are only 6.8 years old. As ships age, maintenance costs increase linearly, which may lead to much stronger scrapping activity. Additionally, new environmental regulations globally are putting pressure on owners to scrap vessels that utilize older bunkering fuels. Since 2021, scrap rates have been under 100,000 TEUs per year and no year since 2017 has seen over 200,000 scrapped. As a base case in 2025, analysts project 200-300,000 TEUs to be scrapped.

*Based on DAC’s impairment tables. Breakeven rates are generally from the oldest ships in the class, and all are based on ships with a market value less than book value. **All ships above 5,000 TEUs in DAC’s fleet are “post-Panamax”.

Depending on how long and how bad the market gets, we may see this number increase far higher. In 2016, when rates hit a 30-year low there was 660,000 TEUs scrapped, including ships that were well within their useful lives. A low-leverage and strong balance sheet operator like DAC would benefit from the impacts of this on the upcycle, even if its margins compress in the short-term.

Currently, DAC operates 74 containerships. Most of DAC’s business operates on longer-term time charters. On time charters DAC provides the ship, covers daily operating costs, maintenance, and insurance to a shipping company, with the shipping company paying the voyage costs (cargo handling, port fees, canal tolls). These charters have an average duration of 3.9 years, with no one customer making up more than 18% of contracted TEUs. Time charter contracts come with extension optionality. Generally, these options are exercised if the cost of renewal is the same or more expensive, which typically occurs on the upswing or at the top of the cycle. Given we are likely past the top of the cycle in our view, DAC may see fewer extension options exercised and will most likely have lower charter rates on renewals instead. In our view, the worst-case scenario is a handful of ships are idle awaiting charter customers while the rest are re-chartered at lower rates. During 2016, the global peak for idle ships was 9%, mostly concentrated in under 5,000 TEU ships. However, this idle period was 71% concentrated in tonnage providers like DAC. DAC’s idle capacity peaked at 9.6% in 4Q16 due to a charter customer going bankrupt.

Segment net income margin contracted due to lower contract charter rates, slightly lower fleet utilization, and new deliveries. Given that most of DAC’s container fleet operates on long-term charters, utilization and charge rates only fluctuate when one contract rolls off, and another begins. 

DAC has 15 new ships under construction, all of which have charter contracts secured upon delivery. New deliveries represent 27.2% of DAC’s existing capacity, which is close to the industry median 31.0%. However, excluding ships over 12,000 TEU, the industry order book is 13.7%. Given the previously discussed age problem in sub 12,000 TEU ships we believe that concentrating new construction on this segment will provide a long-term advantage. According to presentation materials, DAC already provides 55.2% of the tonnage in the 2,200-13,200 TEU category.

Dry Bulk

The dry bulk market is currently oversupplied. Since 2020, fleet supply has far outpaced demand amid a weak global economy. BIMCO (Baltic and International Maritime Council) projects supply/demand dynamics to continue to weaken into 2026. Between 2025 and the end of 2026 global DWT dry bulk supply is expected to increase by 5.7%, while demand will only grow 1-2% over the same time frame.

Several factors could change this though the balance is more negative than positive. A broad re-opening of Red Sea traffic would reduce demand by a further 2%. Chinese steel is expected to stay flat amid a domestic property crisis and low industrial activity globally. Coal shipments are expected to fall 4% to 2026 due to increases in renewable energy. American tariffs will likely further slow Chinese steel growth and potentially global industrial output, with BIMCO estimating 4% of global dry bulk demand affected. On the other side, as previously discussed with container shipping, the bottom of the cycle usually leads to an increase in scrapping activity and cancellation of
new ship orders which should reduce oversupply headwinds. 

While the dry bulk market reportedly has begun a modest price recovery in the quarter ending June 2025, DAC expects a full recovery to be a way off without ‘further growth initiatives in China’. Specifically important for DAC is iron ore consumption in China, which is not projected to meaningfully increase during 2025 or 2026. Fortunately, this is DAC’s smallest segment.

The large decrease in the net income margin of the dry bulk segment was due to DAC electing to drydock all but 1 of its 10 dry bulk vessels. While a recovery in 2025 or early 2026 is unlikely for dry bulk shipping, we believe that there may be a recovery in the latter half of 2026 or in 2027. We believe the timing of DAC’s dry docking, which only needs to be conducted once every 3-5 years, indicates that DAC’s sees a more stable recovery in the middle of 2026. Additionally, the dry bulk fleet has elected to operate mostly on spot-rates and short-term charters in order to capture upside.

Risk

While US-based trade is under threat from tariffs, the largest risk to DAC is specifically US-China trade. Early in 2025, the Trump administration had proposed a $1.5 million flat fee per Chinese-built vessel docking in the US. After widespread industry backlash, the administration lowered the rates, though they will likely represent an extra cost to DAC in contracts. The fee type that applies to DAC is for Chinese-built ships, which are now charged as the higher of $18 per net tonnage or $120 per container in October 2025, escalating to $33 per net tonnage or $250 per container by April 2028. Ships under 4,000 TEU are exempt. For example, an 8,500 TEU ship with a theoretical net tonnage of 55,000 would pay voyage fees of between $500,000 and $1 million before this new fee. Assuming it is 100% loaded, it would pay an extra $1.02 million in 2025 and an extra $2.13 million in 2028.

All of DAC’s 15 newest ships are made in China. Of the existing fleet, we estimate that 65% of DAC’s current capacity is NOT Chinese-built with its largest container ships (>9,500 TEU) being built by Hyundai in Korea. All in all, the aggregate impact on the market will likely be an increase in freight rates, though potentially lower margins depending on how contracts price in the fees. As previously discussed, usually the contracts for container ships are long and time-charter in nature, meaning the charterer pays voyage costs and fees. However, this new fee essentially triples the voyage costs which will need to be absorbed somewhere.

Financials

For the trailing twelve months ending March 2025, revenues grew by 3.1%, with gross margin marginally contracting to 71.3%. Company-wide net income margin was 46.3%, a 347bps decrease due to an increase in debt for the construction of new vessels as well as broadly increased repair and maintenance costs due to new ship acquisitions and the dry docking of dry bulk ships.

*Rate is net of voyage costs, such as port fees, fuel, customs etc. Daily operating cost is the general maintenance of ships, insurance, etc.

DAC has approximately 99% of operating days contracted through the end of 2025, and 85% of days contracted through the end of 2026.  

Container Contracting

DAC has a tangible book value per share of $188.10, far exceeding its share price. Ships are extremely large capital investments with very long useful lives (25+ years), and the book value does not consider the charter earnings of the ships. While a large book of ships may provide more favorable asset-backed lending during booms, during downcycles it becomes difficult to sell ships at fair values leading to elevated scrapping activity and a tightening of asset-backed lending conditions.

For the trailing twelve months ending March 2025, DAC had negative free cash flow, due to the new ship construction. As previously discussed, DAC has 15 ships under construction, all of which will be contracted upon delivery. We expect free cash flow to be dragged down by the capital expenditures associated with it, which will roll off by 2029 provided there are no further expansions of the fleet. Adjusting for this figure, DAC had a trailing twelve-month free cash flow of $572.4 million, flat year over year due to increased dry docking costs associated with bulk carriers and interest payments from financing.

Overall, DAC has a net debt to adjusted EBITDA (less share comp) of 0.4x, which includes the $469.7 million in cash on hand. DAC debt is rated at BB+, with 43 out of its 47 containerized vessels have no asset-level debt. We believe that DAC is in a strong financial position, with the lowest net debt among peers with a coverage ratio of 13.9x meaningfully above the industry average of 4.9x.

Currently DAC pays a dividend of 3.8%, or $3.40 annually. We believe this dividend is safe at its present level even in the event of a broad downturn in the market. Recently, DAC upsized its repurchase program by an additional $100 million, with $104 million now remaining or 6.3% of outstanding shares.

Conclusion

While medium-term headwinds like tariffs and oversupply do threaten the broader market, we believe DAC’s long-term charter structure has it insulated until at least 2027. Going into 2027, we believe that elevated scrapping activity will provide at least some relief and provide a boost to newer and cleaner operators like DAC. With a dividend yield of 3.8% backed by low leverage and high free-cash flow, we believe that DAC is a solid investment for dividend investors.

Peer Comparisons

$Danaos(DAC)$ $Costamare(CMRE)$ $Global Ship Lease(GSL)$ $Navios Maritime Partners LP(NMM)$ $Castor Maritime, Inc.(CTRM)$

For whom haven't open CBA can know more from below:

🏦 Open a CBA today and enjoy privileges of up to SGD 20,000 in trading limit with 0 commission. Trade SG, HK, US stocks as well as ETFs unlimitedly!

Find out more here：

• Trade on a Cash Boost Account and enjoy up to 6 months of Commission-Free trading.

• 💰Join the TB Contra Telegram Group to Get $10 Trading Vouchers Now🎉

• 💰CBA Mini Course 1: What is Cash Boost Account(CBA)?