Star Bulk Carriers (SBLK) is a global shipping company offering international seaborne transportation solutions in the dry bulk sector. The company’s vessels transport major bulks, such as iron ore, minerals, grain, and minor bulks, among others, comprising bauxite, fertilizers, and steel products. I am bullish on SBLK stock.
Star Bulk operates a fleet of 128 vessels, with an aggregate capacity of 14.1 million dwt (deadweight tonnage), comprising 17 Newcastlemax, 22 Capesize, two Mini Capesize, seven Post Panamax, 41 Kamsarmax, two Panamax, 20 Ultramax, and 17 Supramax vessels with holding capacities between 52,425 dwt and 209,529 dwt.
Over the past couple of years, the company has benefited massively from the COVID-19 pandemic, powered by the supply chain crisis and the higher commodity prices, which resulted in surging chartering rates.
While the Baltic Dry Index has corrected significantly from its October highs as the market has been normalizing, it still hovers at around double its five-year average levels. Hence, chartering rates are still at very lucrative levels, and the company is set to report huge earnings in the next two to three years based on the ongoing market conditions.
The New Dividend Policy
Following the ongoing tailwinds Star Bulk enjoys and the record profitability levels being recorded, the company updated its dividend policy this year in order to share its spoils with shareholders.
The company is to retain $2.1 million in cash for every vessel from Q4 2021 and onwards and distribute the rest of its free cash flow in dividends. Through this policy, the company paid a $1.25 dividend per share based on its Q3 results (the cash retention was $1.9 million/vessel in Q3 – but will be $2.1 million from here on).
Now assuming the company enjoys TCE (Time Charter Equivalent) rates of around $21,000 to $24,000 per day next year, which even implies a correction from its current rates (the company achieved an average TCE of $30,626 per day in Q3), Star Bulk should report a free cash flow per share anywhere from $3.8 to $5.2. This implies a free cash flow yield anywhere from 15.8% to 21.6%.
Based on the company’s dividend policy, the dividend yield should be just below these yields (say, 12%-15%) to account for the cash retained per vessel. Now assuming rates of $27,000 to $30,000, SBLK would experience yields north of 30%.
Considering that supply chain constraints have been lasting, it wouldn’t be unlikely to see a rebound of rates in this range, which would result in magnificent returns. However, in any case, the company is likely to distribute tons of cash to its shareholders in the short-to-medium term based on the current market conditions.
It wouldn’t be unlikely if Star Bulk were to distribute dividends equal to its current market over the next three years. Consequently, Star Bulk is one of my top dividend stocks going forward, despite its variable dividends per share.
I am bullish on the stock based on its short-to-medium-term prospects. Still, investors need to be wary as the industry is very cyclical, and rates can easily turn unfavorable after 2022-2023, which would correct the share price despite hefty distributions.
Wall Street’s Take
Turning to Wall Street, Star Bulk Carriers has a Moderate Buy consensus rating, based on two Buys assigned in the past three months. At $37.00, the average Star Bulk Carriers price target implies 53.9% upside potential.
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Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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