Star Bulk Carriers (SBLK) is a multinational shipping corporation providing transnational seaborne transportation services in the dry bulk industry. Star Bulk’s vessels carry large bulks, including iron ore, grain, and minerals. Additionally, they carry minor bulks, among others, such as fertilizers, bauxite, and steel and its by-products.
The company runs a fleet of 128 vessels, boasting an aggregate capacity of 14.1 million dwt (deadweight tonnage), including 17 Newcastlemax, seven Post Panamax, 22 Capesize, 41 Kamsarmax, two Panamax, two Mini Capesize, 20 Ultramax, and 17 Supramax vessels. Their holding capacities range between 52,425 dwt and 209,529 dwt based on each vessel’s class.
The dry bulk industry has experienced profound tailwinds since the beginning of the COVID-19 pandemic. Supply chain issues resulted in a major increase in dry bulk rates, allowing players in the industry such as Star Bulk to charge fantastic rates.
While the pandemic has mostly faded out, dry bulk rates remain more than double their historical average. This is because various factors have contributed to higher commodity prices, such as elevated inflation levels and the ongoing invasion of Ukraine. Since the cargo that dry bulk vessels are now transporting is significantly more valuable, they enjoy increased pricing leverage. Thus, as long as the ongoing macroeconomic turmoil persists, Star Bulk and its peers are set to be considerably benefiting.
Based on the current chartering rates and dry bulk space (e.g., vessel order book, which remains at all-time low levels), Star Bulk should keep reporting tremendous earnings in the next few years. This is going to translate to huge dividends going forward based on the company’s revised dividend policy.
Accordingly, I remain bullish on SBLK stock.
Recent Performance
Star Bulk Carriers Q1 results reflected the favorable conditions in the dry bulk market, resulting in the company posting its best Q1 results in its history. Voyage revenues came in at $360.9 million, 80% higher year-over-year, with the company attaining an average TCE (Time Charter Equivalent) rate per vessel of $27,405 per day. This compares with an average TCE of $15,462 in the prior-year period.
With costs only marginally growing compared to last year, the tremendous growth in revenues resulted in an even more combustive upsurge in margins, leading to the company’s bottom line soaring. Specifically, net income came in at $170.4 million, or $1.67 per share, versus $35.8 million, or $0.36 per share last year, implying an increase of roughly 376%.
Star Bulk’s record numbers allowed management to continue bolstering its balance sheet. As of May 20th, Star Bulk’s cash & liquidity balance and net debt stood at $532.6 million and $944.7 million, indicating a year-over-year improvement of 306% and 43%, respectively.
Based on the current dry bulk rates and across-the-board state of the market, we estimate the company will achieve earnings per share of roughly $7.00 for fiscal 2022, quite close to last year’s figure.
Massive Dividends Ahead
With Star Bulk enjoying record profitability levels, the company revised its dividend policy last year, intending to share its spoils with stockholders.
According to the policy, the company currently seeks to retain $2.1 million in cash for every vessel and pay out the remainder of its free cash flow in dividends. In line with this policy, management declared and paid a $1.65 dividend per share based on its Q1 results.
Now, assuming the company enjoys TCE (Time Charter Equivalent) rates of around $24,000 to $30,000 per day this year, which even implies a correction from its current rates (Star Bulk achieved an average TCE of $27,405 per day in Q1), Star Bulk could report a free cash flow per share ranging from $4.8 to $7.4. This suggests a free cash flow yield ranging from 20% to 30.5% at the stock’s current price of $24.25.
Utilizing the company’s dividend policy, this year’s dividend yield should be just below these yields to account for the cash retained per vessel. From another point of view, assuming stable rates and a quarterly dividend of $1.65, the dividend yield would come close to 27.2% at the stock’s current levels.
With supply chain constraints enduring in Q2, I wouldn’t be surprised to see rates increase further in the second half of the year, which is historically a busier period in the industry. That could result in even higher yields, though we remain prudent. Regardless, Star Bulk is going to distribute giant amounts of cash to its shareholders in this, and possibly in the coming years under the present market conditions.
In fact, Star Bulk could pay out dividends equivalent to its present market over the next three to four years. However, investors must note that dividends are variable. Therefore, there is no stability in payouts, with dry bulk rates predominantly determining each quarterly amount.
Wall Street’s Take
Turning to Wall Street, Star Bulk Carriers has a Strong Buy consensus rating based on five Buys assigned in the past three months. At $38, the average Star Bulk Carriers stock forecast indicates 56.64% upside potential.
Takeaway
Star Bulk carriers continues to enjoy robust industry tailwinds in a post-COVID-19 world, as inflation, macroeconomic headwinds, supply chain bottlenecks, and industry dynamics sustain rates at elevated levels.
Based on its revised dividend policy, investors should receive massive dividends in the coming quarters, even if rates were to somewhat ease. However, investors are urged to be wary of the fact that the industry can be wildly cyclical, and rates could tread lower in the medium term, which would likely pressure the share price notwithstanding the rich payouts.
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