Warning: This Stock’s 12% Dividend is Probably Not Sustainable

I have heard from numerous business owners that it used to cost them, on average, around $2,000 to ship a large container of goods on a cargo ship. Today, that number is 10 times higher.

The combination of surges in demand, broken supply chains and labor shortages has resulted in skyrocketing prices for global shipping companies. This is great news for their shareholders – especially the ones who like dividends.

For example, take small cap Star Bulk Carriers Corp. (Nasdaq: SBLK), which operates out of Athens, Greece. It paid a $0.70 per share quarterly dividend last month, which comes out to a sky-high 12.3% yield on an annual basis.

But can the company continue to deliver such a high yield the way its 128 vessels deliver goods around the world?

Last year, Star Bulk Carriers generated $98.5 million in free cash flow but paid out only $4.8 million in dividends. As cash flow increases this year to an expected $586.6 million, dividends paid is forecast to come out to $325.1 million.

But before the ongoing surge in prices, Star Bulk Carriers did not generate free cash flow for several years.

Based on free cash flow and dividend payments for last year and those expected for this year, Star Bulk Carriers can easily afford its dividend.

However, its dividend payment history is abysmal.

It paid a nickel per share quarterly from 2009 through 2011, then slashed the dividend to $0.015 in 2012. It omitted its dividend in late 2012 and didn’t pay one for seven years. In late 2019, it began paying a dividend but stopped after two quarters when the pandemic struck.

Then in May, as cash flow was surging, Star Bulk Carriers returned cash to shareholders in the form of a big dividend (to its credit). The May dividend was $0.30 per share, and the company upped it to $0.70 in September. On the company’s second quarter conference call, management didn’t deny some analysts’ assumptions that the next dividend will be more than $1 per share.

So, on the one hand, when times are good, management shares the wealth with investors and pays a big dividend. But times aren’t always good in this industry. There’s a lot of feast and famine. And when Star Bulk Carriers is not flush with cash, it (appropriately) doesn’t pay shareholders a dividend.

The question is this: How long will the company stay strongly cash flow positive?

Over the past 15 years, Star Bulk Carriers has been free cash flow positive for six of them. Can it sustain strong enough positive cash flows to continue paying such a big dividend?

If history is any indication, the answer is likely no.

Dividend Safety Rating: D

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— Marc Lichtenfeld

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Source: Wealthy Retirement