Star Bulk Carriers: High Dividend Yield; Stock Hold (NASDAQ:SBLK)

Fishing for high yield income? The marine shipping industry has long been a source of high % dividend yields, due to the ups and downs of shipping rates and general volatility.

With dry bulk rates soaring in 2021, early 2022, and lower but still high in the 2nd half of 2022, certain shipping companies, such as Star Bulk Carriers (NASDAQ:SBLK) have reaped the benefits.

Company Profile

Star Bulk is a global shipping company that provides transportation services of dry bulk cargoes. On a fully delivered basis, the Star Bulk fleet is the largest dry bulk fleet among U.S. and European companies, comprised of 128 modern vessels built in world-class shipyards and with an average age of ~10 years. The fleet’s composition is highly diversified, ranging from Supramax vessels to Newcastlemax vessels, and has a total capacity of more than 14 million DWT.

Star Bulk’s vessels transport major bulks which include iron ore, minerals and grain, and minor bulks such as bauxite, fertilizers, and steel products. (SBLK site) SBLK’s fleet is geared toward larger vessels, with 54.6% in Newcastlemax and Capesize. The larger vessels have continued to be in higher demand in this strong market.

One of SBLK’s big advantages is that its operating expense/vessel is among the lowest in its peer group – it was $4,769.00/day, as of 9/30/22:

After 3 years of growth in 2017-2019, dry bulk trade fell -1.6% in Covid-challenged 2020. However, it bounced back big time in 2021, rising 3.5%, with ton-miles growth of 3.7%.

2022 is estimated to have declined -1.6%, but 2023 is expected to have ton-miles growth of 1.6%, with overall growth of 0.8%:

Earnings

SBLK’s Q3 ’22 earnings faced tough comps – the Daily TCE rate fell over 20%, to $24.37M vs. Q3 ’21, when it was $30.63M. This in turn pushed Revenue down 12.5%; while Net Income and Adjusted EPS both fell nearly 40%; and Adjusted EBITDA fell 31.6%:

SBLK had incredible growth in 2021’s boom year, with 4-digit growth in Net Income and EPS: and 3-digit growth in Revenue and EBITDA. In addition, management was able to decrease Interest Expense by 20.5%.

Q1-3 2022 has seen strong, albeit lower growth rates, in the ~23 to 26% range, in addition to a further -12.7% decrease in Interest Expense.

Looking forward to Q4 2022, SBLK’s fleet-wide coverage is at 66% of available days, at $22,772/vessel per day, down ~-6.5%.

Dividends

SBLK pays a variable dividend, based upon a cash flow formula that management adopted in 2021. It has paid $6.50 in quarterly dividends over the past 4 quarters, which gives it a bodacious trailing dividend yield of 33.80%, based upon its $19.23 2022 year ending closing price.

Management declared a $1.20 dividend for SBLK’s Q4 ’22 payout, down from $1.65 in the previous 2 quarters, but, even with that decline, its forward dividend yield is a nosebleed 24.96%. It should go ex-dividend next on ~3/1/23, with a ~3/15/23 pay date.

Of course, since SBLK pays a variable quarterly dividend, you should take that ~25% forward dividend yield with a large grain of salt, since there’s no way to know now what the March 2023 quarterly dividend will actually be. Management expects that it will be lower than $1.20, due to lower forward freight arrangements.

SBLK’s management began a new dividend policy in 2021, which resulted in much higher payouts. “As of May 2021, the current dividend policy provides that the Board may declare a dividend in each of February, May, August and November in an amount equal to: Star Bulk’s Total Cash Balance, minus the product of the Minimum Cash Balance per Vessel and the Number of Vessels.” (SBLK site)

On a diluted Adjusted EPS basis, SBLK’s dividend payout ratio was a sub-par 112% For Q3 ’22, with trailing average of 83.87%:

However, Adjusted EPS includes $.38-$.39/share in non-cash Depreciation & Amortization, so taking that out of the dividend coverage formula shows a much clearer picture. On this EBDA/Share basis, SBLK’s Q3 ’22 dividend payout ratio was 82.43%, still its highest in the last 4 quarters, but much better than 112%. The trailing EBDA payout ratio is 70%:

Profitability & Leverage

With all of their investments in capital-intensive assets, you’d think that ship-owning companies would be heavily in debt, but that’s not the case. In fact, SBLK’s .96X Net Debt/EBITDA leverage ratio is in line with the industry average. SBLK’s Debt/Equity ratio of .67X is much lower than the industry’s .97X average, while its 19.25X Interest coverage is quite strong, but not as strong as 26.48X industry average.

SBLK’s ROA, ROE, and EBITDA Margin are all above industry averages.

Debt & Liquidity

Management has been quite active in deleveraging over the past 2 years, decreasing debt by ~43%. They did $402.6M in refinancings in 2022. SBLK has 13 unlevered vessels and has extended the average maturity of its outstanding facilities from 3.6 to 4.5 years. Management expects to save ~$4.9M/year in interest costs from more competitive margins.

SBLK’s total liquidity was $417M, as of 11/15/22:

Performance

While SBLK trailed the Marine Shipping industry’s average price performance over the past year, it has outperformed the industry and the S&P 500 on a total return basis, with a ~23% total return, vs. ~21% for the shipping industry, and -18% for the S&P:

Analysts’ Targets

Since our last coverage of SBLK in early September ’22, analysts have decreased their average price target by -12.3%, to $28.71; and their high price target by -15%, to $34.00.

At $19.23, SBLK is 12.6% below the lowest price target, and 33% below the current average price target.

Valuations

SBLK is a big player in the marine shipping industry, with a $1.96B market cap, over 2X the industry average. While its trailing P/E of 2.78X is much lower than the industry average, its Price/Book, although below 1X, is higher than the .7X industry average. Its P/Sales is roughly in line, while its EV/EBITDA is lower than average.

SBLK’s forward P/E is ~5.20X, vs. ~6.50X for the industry average.

Parting Thoughts:

Q4 ’22 drydockings and refurbishing off-hire days expected to be similar to Q3 ’22, but 2023’s off-hire days look much lower, which should aid earnings:

We rate SBLK a HOLD for now, due to a probable lower quarterly variable dividend coming for the next quarter, which may depress the price/share when it’s announced.

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All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.