Star Bulk Stock: Rich Dividend Yields As Market Volatility Remains (NASDAQ:SBLK)

We previously covered Star Bulk Carriers (NASDAQ:SBLK) in December 2023, discussing its excellent intermediate-term prospects through the sustained fleet renewal, moderating net debt situation, and the promising dry bulk outlook through 2024.

With the global economy already in its down cycle, we believed that there might be an excellent upside potential to the intermediate-term demand recovery for dry bulk commodities.

In this article, we shall discuss why SBLK remains a viable dividend investment thesis, with the higher TCE rates likely to boost its adj EBITDA generation and eventually, its quarterly dividend payouts through Q3’24.

At the same time, the merger with Eagle Bulk (EGLE) has been completed, with the combined company likely to generate great synergy in operations while being able to command excellent TCE rates as one of the largest dry bulk companies globally with a wide range in fleet profile.

The Near-Term SBLK Investment Thesis Remains Excellent

For now, it is no secret that SBLK, a dry bulk shipping company based in Greece, is a beneficiary of the ongoing Red Sea crisis.

The management has already guided a massive jump in its FQ1’24 TCE rates for Capesize fleets at an average of $27K (+9.7% QoQ/ +60.7% YoY), Panamax at $16K (+5.1% QoQ/ +15.1% YoY), and Supramax at $17.35K (+10.4% QoQ/ +40% YoY), respectively.

The FQ1’24 estimated TCE rates across all of its fleets at $19.1K (+4.4% QoQ/ +34.6% YoY) is also higher than the dry bulker’s FY2023 average TCE rates of $15.82K (-37.8% YoY), triggering further tailwinds to its near-term prospects after the hyper-pandemic supply chain issues eased by the end of 2022.

At the same time, with the SBLK-EGLE merger approved and completed by April 09, 2024, the combined company also stands to gain as the largest US listed dry bulk shipping company with approximately 169 of owned vessels, with the rising spot rates triggering the increase in its top/ bottom lines.

With SBLK’s FQ1’24 TCE rates well exceeding the already elevated spot rates for Capesize fleets at an average of $24.1K/ Panamax at $18.29K/ Supramax at $15.1K in Q1’24, respectively, based on the January 2024/ February/ March averages, it is apparent that that the dry bulker has been able to command premium rates with over 97% of its combined fleets scrubber fitted.

The latter is important indeed, since it allows SBLK to use the “less expensive heavy fuel oil (HFO)” currently at $543 per metric ton, compared to “non-scrubber fitted fleets using ultra or low Sulphur fuel (ULSFO or VLSFO) currently at $665 per metric ton to comply with limits for Sulphur emissions.”

In addition, with the latest spot rates for Capesize fleets continuing to rise to an average of $25K (+3.7% QoQ/ +72.4 YoY)/ Panamax to $19.1K (+4.4% QoQ/ +21.6 YoY)/ Supramax to $15.5K (+2.6% QoQ/ +23% YoY) as of April 17, 2024, we may see the dry bulker similarly guide promising TCE rates for FQ2’24.

With SBLK likely to reroute its transit through the Cape of Good Hope as it looks to stop sending its ships through the Suez Canal from February 2024 onwards, we may see the transit times also prolonged due to the additional 15 days in transit and 4K in mileage.

As a result of the macro events and uncertain resolution, we concur with Maersk (OTCPK:AMKBF) (OTCPK:AMKBY), whom are already expecting the diversion to last through Q3’24 – triggering further tailwinds for the shipping industry.

The Consensus Forward Estimates

Perhaps this is why the consensus have temporarily estimated a drastic jump in SBLK’s adj EBITDA margins in FY2024 attributed to the growing TCE rates, with the jump in top/ bottom lines attributed to the merger with EGLE.

It is apparent from these numbers that the dry bulker is expected to remain profitable enough on a Free Cash Flow basis to continue paying robust dividends, while deleveraging its balance sheet at an estimated long-term debts of $1.3B (post forma).

At the same time, with a relatively reasonable estimated net-debt-to-EBITDA ratio of 1.98x (post forma), compared to the Marine Shipping average ratio of 1.83x, we believe that the all stock EGLE merger has been prudent indeed.

So, Is SBLK Stock A Buy, Sell, or Hold?

SBLK 3Y Stock Price

For now, SBLK has moderately retraced as the overall market pulls back nearing the Q1’24 earnings season, with the stock still trading near its 2024 tops.

SBLK Valuations

Despite the intermediate term tailwinds, SBLK also trades at a relatively reasonable FWD EV/ EBITDA valuations of 6.54x, compared to its 5Y average of 6.61x and its direct peers, such as Genco Shipping (GNK) at 6.26x and Golden Ocean Group Limited (GOGL) at 7.52x.

At the same time, as with dividend stocks, we believe that the key gauge to the entry point will be its forward yields, currently at a rich number of 7.82%, higher than our previous article at 4.38%.

Compared to the US Treasury’s yields of between 4.61% and 5.38%, we believe that SBLK’s payouts are compelling indeed, especially since the market has priced in a Fed rate cut in 2024 as the EU Central Bank similarly signals the first cut by June 2024.

As a result of its robust dividend investment thesis, we are maintaining our Buy rating for the SBLK stock, though with no specific entry point since it depends on individual investors’ dollar cost averages and portfolio allocation.

With the market pullback still ongoing, readers may want to time their entry points upon a moderate pullback for an improved margin of safety, preferably after March 28, 2024 due to the potential selling pressure from SBLK’s upcoming dividend payout.

It goes without saying that anyone who adds SBLK here must also temper their long-term expectations, with it only suitable for investors with higher risk tolerance and appetite toward cyclical and variable dividends.

With the global economic/ geopolitical activities still uncertain, we may see the global demand for commodities and consequently, its fleet utilization and TCE rates fluctuate accordingly.