Star Bulk Carriers (NASDAQ:SBLK) stock offers an enormous dividend yield of over 30%. The high yield of this shipping company that provides transportation solutions in the dry bulk sector is lucrative. However, a slowdown in demand amid a weak macro environment puts its yield at risk. Even with a decline, the yield could stay high, making it a solid dividend play.
Let’s Take a Closer Look at SBLK’s Dividend
SBLK’s gigantic dividend yield is partly due to its generous and variable dividend policy. The company returns excess cash to its shareholders after retaining the minimum cash balance per vessel multiplied by the number of vessels. While this policy ensures that the payouts are secure, it works well for the shareholders when the company is earning big, especially amid a favorable operating environment.
It’s worth highlighting that solid demand and supply bottlenecks pushed the charter rate higher in 2020 and 2021, supporting the payouts of SBLK. However, demand and rates have weakened in the recent past due to headwinds from China’s zero-COVID policy and fear of a global economic slowdown. This weighed on SBLK’s stock price but drove its dividend yield higher.
Deutsche Bank analyst Amit Mehrotra decreased his “dry bulk carrier rate estimates for Star Bulk Carriers (SBLK) by ~23% on average for 2023.” Given the downward rate revisions, the analyst lowered his “annual dividend per share payout for Star Bulk Carriers.”
The analyst reduced his price target to $33 (based on a 10% dividend yield) on SBLK stock from $40 as a result of the decline in yield.
However, Mehrotra added, “Our price target is derived from a dividend valuation framework, which assumes the company will maintain a 10% dividend yield.” He sees this yield as “very conservative.”
The analyst expects SBLK to “achieve a 10% dividend yield” due to the significant FCF (free cash flow) generation and the company’s ability to maintain a sustainable dividend.
Given his confidence in SBLK’s free cash flows and sustainable dividend, Mehrotra maintains a bullish outlook.
Is Star Bulk Carriers Stock a Buy?
Star Bulk stock has a Strong Buy rating consensus on TipRanks based on four unanimous Buy recommendations. Meanwhile, analysts’ average price target of $29.50 implies 50.2% upside potential.
While analysts are bullish, Star Bulk Carriers stock has a negative signal from hedge funds. Our data shows that hedge funds sold 286.4K SBLK stock last quarter. Moreover, the stock sports a Neutral Smart Score of seven on 10 on TipRanks.
Bottom Line
The weaker market conditions, including the decline in charter rates and low dry bulk order book, are taking a toll on SBLK’s financials. For instance, SBLK delivered an adjusted EPS of $1.33 in Q3, which fell short of Street’s estimates of $1.41 and declined by 39% year-over-year. While its earnings declined, SBLK announced a dividend of $1.20 per share, marking its seventh consecutive quarterly distribution.
Overall, SBLK’s yield may moderate, but it could still remain high, making it an attractive stock for income investors.
