Star Bulk Carriers (NASDAQ: SBLK) stands in a polarizing position. The company’s balance sheet improved massively following the rally in dry bulk rates that took place between mid-2020 and late 2021. With its dividend policy also turning shareholder-friendly, there’s much to like. However, the dry bulk market has turned 180 degrees recently, as multiple commodity-related factors have reduced demand for dry bulk vessels. Thus, the company’s currently massive dividends are likely to soften significantly.
For this reason, I am neutral on the stock.
What’s Happening in the Dry Bulk Industry?
The dry bulk industry has been on a roller-coaster ride over the past couple of years. Basically, the order book for dry bulk vessels is currently at a 25-year low. This means that only a limited number of new vessels will be coming online in the coming years, making the existing ones more valuable and less available. When demand for dry bulks surges against a limited number of vessels, charter rates surge, resulting in dry bulk companies such as Star Bulk Carriers reporting massive profits.
This is exactly what happened amid the COVID-19 pandemic. Supply-chain bottlenecks led to a fantastic surge in dry bulk rates, enabling players in the industry to charge outlandish rates. Even though the pandemic has mostly eased, dry bulk rates remained strong up until recently.
This is due to a number of factors that continued to contribute to elevated commodity prices, such as soaring inflation levels and the lasting invasion of Ukraine. Because the payload that dry bulk vessels had to move became quite more valuable, pricing leverage remained. However, things have turned sour lately, with the dry bulk index plummeting.
Chinese imports have shrunk as a result of China’s tough zero-COVID policy. China’s steel industry has gone through a firm slowed down lately as well due to incredibly higher input costs and a weak real estate market. In fact, China’s property sector is still worsening by the day.
Export disruptions and the war in Ukraine have negatively impacted the dry bulk industry as well. While the war in Ukraine initially boosted the industry, the real effects are only now starting to show up, as trade conditions across Europe have significantly worsened.
Lower iron ore exports from Brazil have also helped dry bulk rates free fall. Specifically, as of July’s data, the exports of Brazil’s iron ore have declined by $2.17 billion, or 43% year-over-year, from $5.04 billion to $2.88 billion.
All these factors highlight just how cyclical the dry bulk industry is and how the results of the companies in the space can easily swing higher or lower in a matter of months.
With 128 dry bulk vessels in its fleet featuring a total capacity of 14.1 million dwt (deadweight tonnage), Star Bulk’s earnings are entirely determined by the underlying supply and demand dynamics between available vessels and commodities. These include iron ore, grain, minerals, fertilizers, bauxite, steel and its by-products, among others.
SBLK’s Q2 Results Still Reflect Elevated Charters
Star Bulk Carriers’ Q2 results were once again stellar, though investors must be wary as they reflect the elevated market rates that were sustained between April and June. Since then, rates have worsened, as explained.
Specifically, Voyage revenues came in at $417.3 million, 34% higher year-over-year, with the company achieving an average Time Charter Equivalent Rate per ship of $40,351 per day. This compares with an average Time Charter Equivalent Rate of $22,927 in Q2 2021.
With expenses only slightly increasing year-over-year, the strong growth in revenues resulted in an even more impressive expansion in margins. This led to the company’s bottom line skyrocketing. Specifically, net income came in at $200.1 million, or $1.96 per share, versus $124.2 million, or $1.22 per share last year, implying a gain of roughly 61.1% and 60.5%, respectively.
Star Bulk’s record profitability enabled management to keep strengthening its balance sheet. As of August 3rd, the company’s cash & liquidity balance and net debt were $474.2 million and $935.5 million, indicating year-over-year improvements of 339% and 43%, respectively.
Current Dividend Rates Aren’t Sustainable
With Star Bulk’s profits surging lately, the company reworked its dividend policy last year in order to share its loot with shareholders. Based on the new policy, the company is going to retain $2.1 million in cash for every vessel in its fleet and distribute the rest of its free cash flow in dividends. Obeying this policy, management declared a $1.65 dividend per share based on its Q2 results. However, such a high dividend is not sustainable moving forward, as already demonstrated by the decline in dry bulk rates.
This dividend rate is the same as the one in the previous quarter, implying an annualized rate of $6.60 and, in turn, a dividend yield of around 34.4% at the stock’s current levels.
Luckily, Star Bulk’s dividend policy allowed for flexibility, and even if payouts decline significantly, investors are still likely to receive robust yields as the company has already secured the $2.1 million per vessel it needs. Thus, most of its free cash flow is to be distributed, but not at such lofty rates.
Is SBLK a Good Stock to Buy?
Regarding Wall Street’s sentiment, Star Bulk Carriers features a Strong Buy consensus rating based on four Buys assigned in the past three months. At $35.50, the average Star Bulk Carriers stock projection suggests 87.6% upside potential.
Conclusion: Be Wary of SBLK’s Future Performance
Star Bulk Carriers reported great numbers in its Q2 results. However, the decline in dry bulk rates since the end of the quarter is going to show up in its upcoming earnings reports.
Further, though investors are likely to keep getting paid great dividends even if Star Bulk’s profitability were to, say, halve, the current seemingly-massive dividend yield is most certainly not sustainable.
In my view, only investors who comprehensively understand the dry bulk industry and its cyclical nature should trade and/or hold Star Bulk Carriers.
