Miro Nenchev/iStock via Getty Images

Miro Nenchev/iStock via Getty Images

There's nothing like a whopper of a dividend to attract yield-hungry income investors. The board of Star Bulk Carriers Corp. (NASDAQ:SBLK ) has been on a tear over the past few quarters, declaring very high dividends in response to soaring profitability as shipping rates soared.

SBLK has trounced the S&P 500 and the Marine Shipping industry over the past year, month, and so far in 2022. It has also outperformed the market over the past quarter, but lags its industry a bit.

Star Bulk is a global shipping company that provides transportation services of dry bulk cargoes. On a fully delivered basis, the Star Bulk fleet is the largest dry bulk fleet among U.S. and European companies, comprised of 128 modern vessels built in world-class shipyards and with an average age of ~10.1 years. The fleet's composition is highly diversified, ranging from Supramax vessels to Newcastlemax vessels, and has a total capacity of more than 14 million DWT.

Star Bulk's vessels transport major bulks which include iron ore, minerals and grain, and minor bulks such as bauxite, fertilizers and steel products.

SBLK's fleet is geared toward larger vessels, with 54.6% in Newcastlemax and Capesize. The larger vessels have been in higher demand in this strong market.

2021 was a big year for dry bulk shipping, with 3.5% growth, following a multi-year low point in 2020. 2022 is expected to have much lower growth in tonnage and ton-miles:

As a result of 2021's dry bulk growth, SBLK had 4-digit earnings growth in 2021. Meanwhile, its Interest Expense dropped by 20.5%.

Q1 2022 saw 80% revenue growth, and triple digit growth in Net Income, Adjusted EPS, and Adjusted EBITDA, along with a further 7% reduction in Interest Expense. The strong growth came thanks to continuing strong Time Charter Equivalent, TCE, rates in Q1 of $27,405/ day per vessel, an increase of 77% vs. Q1 '21, and the highest Q1 TCE rate in SBLK's history.

At Q1's ~$27K TCE rate, management estimates a Free Cash Flow of $6.10/Share, which would bode well for future dividends in 2022, if rates stay at that level. On the Q1 '22 call, management said that rates were higher so far in Q2:

"Looking at chartering coverage for the second quarter of 2022, we have covered 74% of our fleet available days at a daily rate of $29,760 per day per vessel."

Looking forward in 2022, SBLK has an estimated $7.5M in Capex, and $11.4M in dry docks in Q2 '22. The capex upgrades are related to BTWS - Ballast Water Treatment Systems. Management estimates dry dock expense for the next 12 months at ~$36.4M, plus $16M in vessel upgrade CapEx. The total expense would be ~$52M, just 3.5% of 2021 revenue of $1.43B.

However, management sees the Q2 '22 dividend as being $.40 lower, at ~$1.25, due to timing:

"Given the recent rally in the market and the increase in bunker prices, we currently estimate that our working capital will increase by approximately $40 million in the second quarter of 2022, negatively affecting our cash balance at quarter end and our dividend for the quarter by approximately $0.40 per share.

This is a timing difference driven by the difference between when earnings are recognized and when cash comes in, and it will reverse at some point in the future." (Q1 '22 call)

Still, even if the next quarterly dividend is "just" $1.25, SBLK's trailing dividend yield would still be very high, at 19.29%, since that amount would be $.55/share higher than the Q2 '21 $.70/share amount.

In case you're wondering what SBLK's dividend payout ratio looks like based on Adjusted EPS, although it's a bit lumpy on a quarterly basis, it's still a respectable 68.88% over the most recent 4 quarters. But to understand SBLK's actual dividend calculation, please see the next section.

The newly declared $1.65 dividend goes ex-dividend on 6/2/22 and pays on ~6/16/22. SBLK's trailing dividend yield is 17.56%, a whopper.

SBLK's management reiterated its dividend policy in May 2021:

"As of May 2021, the current dividend policy provides that the Board may declare a dividend in each of February, May, August and November in an amount equal to (A) Star Bulk's Total Cash Balance minus (B) the product of (I) the Minimum Cash Balance per Vessel and (II) the Number of Vessels." (SBLK site).

Deducting the total minimum cash threshold of $268.8M from the $440.1M cash balance gives us the Declared Dividend amount of $171.3M.

Dividing the $171.3M by the 103.3M shares = $1.658/share. SBLK declared a $1.65 dividend.

SBLK's blowout earnings over the past 4 quarters resulted in an outsized ROA of ~123%, and ROE of ~39%, both of which are much higher than marine shipping industry averages. Its EBITDA Margin was also higher than average, while its Debt/Equity is much lower, while Net Debt/EBITDA leverage is in line. The surge in EBITDA and declining interest expense led to very strong Interest coverage of 17.93X.

Management has made big inroads on reducing the debt load over the past 2+ years, reducing it by ~43%, to $944.7M, as of 5/20/22. SBLK has 6 unlevered vessels and no debt maturities until the end Q3 2023.

Liquidity was $444M as of 3/31/22, and increased to $532.6M as of 5/20/22.

After its big price gains, you'd expect SBLK to be getting much higher valuations vs. its industry, but that's mostly not the case. Its trailing P/E of 3.9X is far below the 17.7X industry average, as is its EV/EBITDA of 4.17X. Price/Book of 1.61X is quite a bit higher than the 1.24X average, while its P/Sales of 2.1X is just a bit higher than the 1.99X industry average.

Meanwhile, its 17.5% trailing dividend yield dwarfs the industry average:

SBLK received a recent BUY rating from Jefferies on 4/27/22, who resumed coverage with a $36.00 price target. At $31.89, it's ~14% below the $37.13 average price target.

We guess the $54M 2-part question is, "How long will these high dry bulk rates last, and enable SBLK's very attractive dividends?"

While ton miles are expected to increase by just 1.6%, heavily tilted towards the second half of the year, a key support for the dry bulk market is the limited global fleet growth. This is due to a low vessel order book, in addition to upcoming environmental regulations, which force vessel scrapping and lower speeds.

We rate SBLK a speculative BUY over the near term, if you have the time to keep an eye on it - those TCE rates will decrease at some point, leading to lower dividends.

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This article was written by

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in SBLK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.