Star Bulk Carriers: Dividends Might Disappear Soon

Introduction

When last discussing Star Bulk Carriers (NASDAQ:SBLK) around the middle of 2022, the big news at the time was central banks rapidly tightening monetary policy but alas, as my previous article warned, it appeared they were unprepared for higher interest rates. Whilst the jury is still out as this is a multi-year topic, it nevertheless seems their dividends might disappear soon as they face the worst operating conditions since the severe downturn of 2020 when the Covid-19 pandemic was ravishing the globe.

Coverage Summary & Ratings

Since many readers are likely short on time, the table below provides a brief summary and ratings for the primary criteria assessed. If interested, this Google Document provides information regarding my rating system and, importantly, links to my library of equivalent analyses that share a comparable approach to enhance cross-investment comparability.

Detailed Analysis

Following 2021 and early 2022 enjoying very strong cash flow performance on the back of the booming operating conditions, this seemingly continued further into 2022 since conducting the previous analysis. As a result, their operating cash flow increased to $653.6m during the first nine months of 2022, which is roughly the same quarterly rate as their result of $229.2m during the first quarter. It also marks a significant increase year-on-year versus their already very strong previous result of $470.7m during the first nine months of 2021.

When it comes to reviewing their quarterly cash flow performance, it is hindered because when reviewing their SEC filings they did not release a Q3 2022 6-K, nor did they release a filing for the third quarter of 2021 one year ago. Unfortunately, this makes it difficult to assess whether their very strong results during the third quarter of 2022 were driven by fundamentals or a potential one-off cash infusion from a working capital draw but as subsequently discussed, there is another clue that indicates the latter was the case. Whilst interesting, the far more important topic is what is laying ahead and on this front, the outlook is concerning with the Baltic Dry Index plunging.

After peaking back in late 2021 and remaining strong throughout the first half of 2022, the Baltic Dry Index weakened materially during the fourth quarter to end the year around 52-week lows. When their upcoming results for the fourth quarter of 2022 land soon, this makes it very likely to see weaker cash flow performance and thus another dividend cut, given their variable dividend policy.

Even worse, the Baltic Dry Index continued weakening thus far into 2023 and now sees itself erasing virtually all of the gains enjoyed during the booming operating conditions following the severe downturn of 2020. Whilst many investors were likely hoping that the reopening of the Chinese economy from Covid-19 lockdowns would help provide a lasting tailwind to keep the good times rolling via higher commodity demand, alas this does not appear to be transpiring.

There are many moving parts but this nevertheless indicates their operating conditions are back near the same lows as during the worst of the Covid-19 pandemic during the first half of 2020, which at the time only saw meager operating cash flow of $7.6m or $15.2m if annualized, as per their Q2 2020 6-K. Obviously, this would leave absolutely nothing for dividend payments after capital expenditure and thus unless there is a sharp U-turn whereby their operating conditions improve significantly, there is a real chance their dividends might disappear soon, as they are suspended.

Due to the inherent volatility of their industry, it is impossible to know for certain when they will see better operating conditions but given the weak economic conditions on the horizon for most of the world in 2023, the backdrop is not necessarily too supportive, especially as the reopening of China has thus far failed to reignite strength. Whilst yes, they have installed scrubbers that help increase profitability, as per slide seven of their third quarter of 2022 results presentation, these alone cannot realistically make up for some of the worst operating conditions during the past five years.

Due to their variable dividend policy that effectively aims to match cash inflows to cash outflows, their capital structure was once again broadly unchanged since conducting the previous analysis. At the time, they saw net debt of $1.066b following the first quarter of 2022, whereas following the third quarter, it is only slightly lower at $988m. Going forwards, this same trend should continue as further dividend cuts are very likely forthcoming as their cash flow performance continues weakening on the back of weaker operating conditions.

When turning to their leverage, it also is broadly unchanged with their net debt-to-EBITDA of 1.14 following the third quarter of 2022 remaining nearby its previous result of 1.19 following the first quarter, thereby remaining within the low territory of between 1.01 and 2.00. Meanwhile, their net debt-to-operating cash flow following the third quarter was only 0.38, which is significantly beneath their accompanying net debt-to-EBITDA as well as its previous result of 1.24 following the first quarter.

Due to their aforementioned lack of working capital information, it was not possible to remove said movements this time, unlike when conducting the previous analysis. As a result, any past-to-present comparison is not possible, but interestingly, the abnormally large gap between their leverage when utilizing EBITDA versus operating cash flow indicates the third quarter likely saw a very large working capital draw that boosted their operating cash flow. If apt, this is obviously not capable of being repeated well into the future and thus, it actually increases the likelihood of an even bigger dividend cut with their upcoming cash flow performance likely to weaken even more severely.

Whilst their low leverage may sound positive, there is one massive caveat to consider, namely, it relies upon their recent financial performance that enjoyed booming operating conditions. As the latter weakens, naturally the resulting weaker financial performance will send their leverage higher in tandem. Obviously, the extent depends upon the length of this downturn, although this nevertheless places pressure upon their dividends.

Similar to their low leverage, due to the help from their trailing booming operating conditions, their debt serviceability is perfect because regardless if their interest expense is compared against EBIT or operating cash flow, it sees results of 14.14 and 17.31, respectively. Once again, this will obviously weaken alongside their upcoming financial performance, and given central banks appear likely to keep monetary policy tight in the foreseeable future, there is scant help ahead. That said, until more time elapses during 2023 and beyond, it remains too early to ascertain how they are faring with higher interest rates and thus provide any follow-up to the warning discussed within my previous analysis.

It should not be surprising by this stage to see that their liquidity remains strong and thus did not materially change since conducting the previous analysis. Following the third quarter of 2022, their current ratio is now 2.10, whilst their accompanying cash ratio is 1.33, which are both very similar to their previous respective results of 2.13 and 1.36 following the first quarter. Thankfully, this will help immensely to endure even a prolonged and severe downturn, although it obviously cannot help provide cash for dividends. Furthermore, their debt maturity profile sees a wave of maturities during 2023 and beyond that will require repayment and refinancing, thereby putting further pressure on their dividends absent of a return to booming operating conditions.

Conclusion

Right now, many of their stats look positive, namely, their low leverage, perfect debt serviceability, and strong liquidity. Although, these are trailing in nature, which means they are inflated by their previously booming operating conditions that are now seemingly a thing of the past following a sharp downturn. Unless they see an equally as sharp U-turn higher in the coming weeks, it would not be surprising to see their dividends disappear soon as their cash flow performance plunges. Even if their dividends are not suspended, the next cut when they release their fourth-quarter results is not likely to be the last and thus, it is seemingly only to get worse before it gets any better. Following this analysis, I believe that downgrading my previous hold rating to a sell rating is now appropriate.

Notes: Unless specified otherwise, all figures in this article were taken from Star Bulk Carriers’ SEC filings, all calculated figures were performed by the author.