Star Bulk Carriers, SBLK, Maybe The Price Will Catch Up With The Dividend?

Star Bulk Carriers (NASDAQ: SBLK) stock currently carries a 14% and change dividend yield. This is the sort of thing that can make us worry about dividend traps – or, perhaps, just that the market hasn’t caught up with the underlying performance of the company.

Star Bulk operates bulk carriers. These are the ships that haul around iron ores, grains, they might also be used for bauxite and so on. The shipping industry traditionally divides into three entirely different segments, each of which can move in either direction independently of the others. Dry bulks, containerised, and oil. It’s container shipping that has had the massive price rises in the past 18 months. However, dry bulk has improved from those bottoms during the pandemic.

One thing that has observably been true in the past is that of the volatility of the industry in all three sectors. It’s easy enough to enter the sector, most of the cost is the capital cost of the ship itself. So, when rates are high more ships are commissioned, old ships are not retired. That leads to rates plummeting, then finally too many ships retire, rates soar and the whole cycle runs around again.

So, as background to the industry, we’re used to cycles of large profits, then losses.

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At Star Bulk their policy seems to be to pay out the free cash flow (ie, after settling the operating and capital costs of the ships) as the dividend. So, given strong freight rates, we would expect to see a rising dividend. That would mean we might expect the share price ro rise to reduce the dividend yield. A capital gain on the stock that is. For 14% is pretty high and if they raise the dividend again then, well….

On the other hand, we might want to think about the global economic background here. There’s a war on, as we know. That could push things either way for shipping of course. Less moving by rail within Europe from Russia and Ukraine might mean more by longer sea journeys. But that might also mean a slowing economy. And trade is leveraged to, geared to, economic growth. Trade increases more, percentage-wise, than GDP does. Or, looking the other way, falls by more in a recession.

So, the decision is, well, which way do we think the global economy is going on this side of the equation. A reversal of global economic growth would be bad for shipping rates.

The issue with the volatility of shi8pping is that shipping companies like Star Bulk are always in play in the markets. It’s known that they are geared to freight rates, which themselves link into general economic growth. So, significant price movement is expected – it’s just the direction of the movement which has to be positioned for.