Your Cut of Every Iron Ore and Grain Shipment Comes With This Stock

Tech bounced back hard from its AI selloff, and oil keeps sliding on hopes the Iran war winds down. That second headline is great news for anything that burns fuel to make money, including the ships hauling the world’s raw materials.

Today we break down a shipping stock that looks underpriced heading into its report.

Star Bulk Carriers (NASDAQ: SBLK) has pulled back over the past month and now trades below its recent highs. Odd timing for a company whose dividend keeps growing, whose insiders have been buying, and whose next quarter is expected to blow last year’s out of the water.

Star Bulk owns one of the largest dry bulk fleets among US and European-listed shipowners. Its ships haul iron ore, coal, grain, bauxite, fertilizer, and steel products worldwide.

Think of it as a toll on global trade in the stuff that builds things, with a payout policy that forwards the toll money straight to you.

A beat, then a bigger dividend

Star Bulk Carriers (NASDAQ: SBLK) crushed its last quarter, with earnings per share of $1.21 against a $0.95 consensus. Management celebrated the way you’d want: it raised the quarterly dividend to $0.90 from $0.50.

That’s the beauty of this setup. When freight rates rise, you don’t wait years to see it. It shows up in your next dividend check.

What management expects next

Third-quarter results land next week. Wall Street expects earnings per share to more than quadruple from a year ago, with revenue up by half.

Freight rates have stayed strong since the last report, which points to another healthy quarter and another sizable payout. And yet the stock slid into the release. The market is handing you a discount right before the company is expected to post a big number.

You get the cash, not the CEO’s wish list

Star Bulk’s policy is simple: it distributes 100% of its free or operating cash flow, after keeping a minimum cash cushion. No empire building. No mystery reinvestment plan. The cash comes to you.

That policy is why the dividend has climbed so fast. The last four payouts went from $0.11 to $0.37, then to $0.50, then to $0.90. That’s more than eightfold in under a year. Try getting that kind of raise at your day job.

Variable, but built for the upswing

Because the payout follows cash flow, it rises and falls with freight rates. In a soft market, your check shrinks. In a strong one, you get the upside in full.

Right now, rates are working in your favor. At the current payout, the annualized yield runs into the double digits. You’d be hard-pressed to find that kind of cash yield from a company this size.

Diversified across every ship size

Star Bulk owns 138 vessels, from giant Newcastlemax and Capesize ships down to nimbler Ultramax and Supramax bulkers. Kamsarmax and Ultramax ships make up the biggest share.

That mix pulls its weight. Big ships swing hard with iron ore demand. Smaller ships carry grain, fertilizer, and steel, which follow different cycles. You get exposure to the whole dry bulk market, not a single bet on Chinese steel mills.

The lowest breakeven in the business

Star Bulk has been called the best-run operator in dry bulk, with the lowest breakeven costs among its peers. In plain English, it starts making money at freight rates where weaker rivals are just covering their bills.

That’s your margin of safety. When rates dip, Star Bulk stays profitable longer. When rates rise, more of every extra dollar drops straight to cash flow, and straight into your dividend.

Debt down, shareholders up

Since 2021, Star Bulk has put more than $3.1 billion to work in capital allocation, including dividends, accretive share buybacks, and cutting net debt by more than 60%.

The balance sheet now looks sturdy, with debt at a modest level relative to equity. That’s what lets management pay out so much without lying awake at night.

Insiders bought higher than you can today

Now for the juicy bit. Star Bulk’s chief operating officer and another insider bought shares at prices above where the stock trades now. Over the past few months, insiders have been net buyers.

Some directors sold along the way too, but the big buy-side checks came from people who see the freight data every single day. You get to buy cheaper than they did.

A single-digit forward multiple

Star Bulk trades at a single-digit forward earnings multiple, a discount to the shipping industry average. Adjusted for expected earnings growth, its PEG ratio sits far below the industry’s too.

Put simply, you’re paying less than the average shipper for one of the best-run fleets in the group. That’s a markdown on quality.

The targets sit well above you

The average analyst price target sits comfortably above the current price, and the analyst consensus fair value lands even higher. Most covering analysts rate it a Buy.

On cash flow, the story gets even louder. Star Bulk generated hundreds of millions in free cash flow over the past year, and a discounted cash flow view puts its value well above where it trades.

The number that scares people off is the payout ratio. On a screener, Star Bulk shows a dividend payout ratio well above 100%. That looks like a company paying out more than it earns.

Look at what’s behind it. Star Bulk sizes its dividend on cash flow, not accounting earnings.

Accounting profit gets dragged down by depreciation on the ships, a non-cash charge that doesn’t drain the bank account. So the payout can look stretched against earnings while staying fully funded by cash.

The policy also has a built-in safety valve. The company keeps a minimum cash balance before paying anything out. If cash flow drops, the dividend shrinks automatically. It’s built so the payout can’t bleed the balance sheet dry.

Dry bulk demand cools. If Chinese steel output or global trade slows, freight rates fall, and so does your dividend. This is the biggest swing factor for the stock.

Oil spikes again. Fuel is a major cost for ships. Oil is sliding now, but a sudden spike would squeeze per-day earnings and the cash available to pay out.

More shares get issued. Star Bulk recently sold new shares in Greece alongside its Athens listing, below net asset value and without an urgent need. If management keeps issuing stock, it dilutes your slice of each dividend.

Star Bulk is one of the best-run fleets in dry bulk, with the lowest breakeven costs, a 100% cash payout policy, a sturdier balance sheet, and insiders who bought higher. The stock is pricing in far more caution than the freight data supports.

I’d buy it here. You get a double-digit cash yield at current payout levels, a big quarter on the way, and a valuation below the industry average.

What would change my mind is a sharp drop in freight rates or another round of below-value share sales. If the stock breaks and holds below $23, step back and reassess.

Entry zone: $25.50 to $28. Add on weakness toward $24. Target: $32 to $35 over 9 to 15 months. Confidence: high.

Looking to buy? Start a position in the $25.50 to $28 range before next week’s report. You’ll be in place when the next dividend gets declared.

Already own it? Hold. In the report, zero in on the size of the new dividend, management’s view on freight rates, and any comments about future share sales.

Main risk to respect: A freight downturn hits the dividend fast. Size your position so a smaller check doesn’t shake you out of the cycle.

That's our coverage for today; thanks for reading! Reply to this email with feedback or any value stocks you want me to check out.

Best Regards,
—Noah Zelvis
Undervalued Edge