Star Bulk Carriers Corp: Bullish 24.4%-Yielder With Low Payout Ratio

Star Bulk Carrier Stock

Great Outlook for SBLK Stock

Whether the companies ship oil, natural gas, grain, iron ore, cars, or refrigerators, marine shipping stocks continue to outpace the broader market.

Because of continued supply chain issues, a decrease in fleet growth, significant demand for dry bulk commodities, and the war in Ukraine, the demand for marine shipping has never been higher.

After factoring in longer trade routes, the dry bulk shipping industry is expected to grow by 2.6%.

The demand in all commodity groups is on the rise. From 2010 to 2023:

(Source: “Corporate Presentation: March 2022,” Star Bulk Carriers Corp, last accessed May 27, 2022.)

This comes at a time when new emissions regulations and the lack of a common standard for vessel propulsion technology have dissuaded companies from ordering new freight ships. The global order book for freight ships is at a 25+ year low, and fleet growth in 2023 is expected to be at its lowest level since 2000.

As such, the outlook for the marine shipping industry is robust, so investors might want to take advantage of that.

If you’re a dividend hog looking for both growth and income, look no further than Star Bulk Carriers Corp (NASDAQ:SBLK). With a diverse fleet of 128 bulk carriers ranging from Supramax to Newcastlemax vessels, Star Bulk Carriers is the largest U.S.-listed dry bulk shipping company.

With an average lifespan of 9.9 years, the company’s ships give it exposure to all cargo types and trade routes. Its Capesize ships mainly transport minerals from the Americas and Australia to East Asia. Star Bulk Carriers Corp’s Supramax vessels carry minerals, grain products, and steel between the Americas, Europe, Africa, Australia, and Indonesia and China, Japan, South Korea, Taiwan, the Philippines, and Malaysia.

Those long trade routes, coupled with rising gas prices, can eat into a marine shipping company’s bottom line. As fuel prices increase, inefficient vessels will be forced to decrease their speeds. Meanwhile, vessels equipped with scrubbers will deliver superior economic performance.

At Star Bulk Carriers Corp, 94% of its ships are fitted with scrubbers, providing significant leverage to fuel price spreads. To date, Star Bulk has generated about $210.0 million in scrubber savings and expects to generate $120.0 million in scrubber savings per year.

Moreover, the company’s fleet has one of the lowest average daily operating expenses in the industry, at $4,310 per vessel per day. It also has one of the most enviable RightShip risk ratings: 4.5 stars. A rating of three, four, or five stars means a ship is an acceptable risk. A rating of two stars means RightShip must be contacted for further review, and a rating of one star means a more detailed investigation is required.

Thanks to Star Bulk Carriers Corp’s fiscal acumen, its balance sheet continues to improve significantly. Since the end of 2019, the company’s adjusted net debt has decreased by 43% to $939.0 million. Over the same period, the company’s cash and liquidity have soared by 373% to $593.8 million.

First-Quarter Earnings & Revenue Beat

For the first quarter ended March 31, Star Bulk Carriers announced that its voyage revenue jumped by 80% year-over-year to $360.8 million. (Source: “Star Bulk Carriers Corp. Reports Net Profit of $170.4 Million for the First Quarter of 2022 and Declares Quarterly Dividend of $1.65 Per Share,” Star Bulk Carriers Corp, May 24, 2022.)

The company’s time charter equivalent (TCE) revenues were $304.9 million in the first quarter of 2022, compared to $156.4 million in the first quarter of 2021. Its TCE rate in the first quarter of 2022 was $27,405, compared to $15,462 in the first quarter of 2021. The 77% increase reflects the significantly improved market conditions.

Star Bulk Carriers Corp’s net income soared by 376% to $170.3 million, or $1.67 per share, in the first quarter of 2022, from $35.7 million, or $0.36 per share, in the same prior-year period.

The company’s adjusted net income in the first quarter of 2022 was $175.6 million, or $1.72 per share, compared to $35.7 million, or $0.36 per share, in the first quarter of 2021. Wall Street was looking for adjusted net income of $1.41 per share.

Star Bulk Carriers Corp’s net cash provided by operating activities was $229.2 million in the first quarter of 2022, compared to $79.2 million in the first quarter of 2021. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were $225.9 million in the first quarter of 2022, compared to $84.7 million in the first quarter of 2021.

Star Bulk Carriers Corp Announces Quarterly Dividend of $1.65/Share

Star Bulk Carriers’ reliable cash flow has allowed SBLK stock to provide investors with ultra-high dividends. In the fourth quarter of 2021, the company announced a quarterly dividend of $2.00 per share, for a yield of 24.4%. (Source: “Dividend Policy,” Star Bulk Carriers Corp, last accessed May 27, 2022.)

While that represented the third consecutive quarter in which management had raised Star Bulk Carriers stock’s dividend, a number of targets must be met for that trend to continue. The company’s dividend is based on its total cash balance minus the product of its minimum cash balance per vessel and number of vessels.

As of March 31, Star Bulk Carriers Corp owned 128 vessels, and its total cash balance was $444.4 million. Taking into account the company’s minimum cash balance per vessel of $2.1 million and deducting the net proceeds of $4.3 million for the shares issued and sold under its effective at-the-market offering programs during the quarter, the board declared a quarterly dividend of $1.65 per share, payable on or around June 16 to shareholders of record as of June 3.

Star Bulk Carriers Corp might have lowered its quarterly payout, but it’s nice to know that SBLK stock’s dividend is still safe. The company’s payout ratio is a paltry 33.5%, which is way below the 90% threshold I like to see. Had the company been less fiscally responsible, it could have easily raised its payout again in the first quarter. Hopefully, because of the company’s strong cash flow and low payout ratio, its board will be able to give investors additional raises this year.

Investors don’t seem to be too put off by the dividend cut. It’s not as if Star Bulk Carriers Corp’s operations aren’t solid. The company did just report an earnings and revenue beat. There aren’t a lot of companies doing that right now.

As a result, Star Bulk Carriers stock continues to outperform the market. As of this writing, SBLK stock is up by:

Chart courtesy of StockCharts.com

The Lowdown on Star Bulk Carriers Stock

The demand for bulk carriers remains high, as is evidenced by Star Bulk Carriers Corp’s continued wonderful financial results. The company recently reported its best daily TCE performance in the first quarter of any year, a period in which TCE rates have been traditionally weaker since 2009.

Looking to the next quarter, Star Bulk Carriers has covered 74.3% of its available days at a TCE of $29,759 per day per vessel. This bodes well for Star Bulk Carriers stockholders, especially those looking for a dividend raise.

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