Star Bulk Carriers: Interesting Dividend Payout

Press Release - Star Bulk Carriers Q3 Financial Results

To conserve cash Star Bulk Carriers (SBLK) has elected to pay half of the 3rd quarter’s 36¢ in cash and the remainder in company stock. Star Bulk Carriers owns a dozen dry bulk cargo ships which it leases out on long term contracts. Dry bulk shippers have been hit hard in line with the Baltic Dry Index losing 95% of its value over the last 8 months. Theoretically, the lower spot rates should not affect the revenues of a company like Star Bulk, which leased out its ships when rates were much higher and should have steady cash flow.

The problem arises when one of the company’s customers declares bankruptcy and drops the lease as happened in October. A ship that was earning $106,000 per day will now probably earn less than 10% of that amount. For a small company like Star Bulk it would only take another contract cancellation or two to put them into bankruptcy.

So it makes sense to give the shareholders some cash to keep them happy. They bought the stock in the first place to get what was supposed to be a steady, high dividend. Paying half the dividend in stock conserves some cash and the management team is taking their entire dividend payouts in stock to show their belief in the company.

I have less faith in management when you take a look at their use of cash earlier in the year. In January the company announced a $50 million stock repurchase plan and it has spent $12.9 million year to date. So far in the 2nd half of 2008 it has purchased almost 1 million shares at an average of almost $8 per share. Now it is issuing over 4 million shares in lieu of cash dividends at a value of $2.30. It looks like the company just threw away most of the money spent so far on the stock repurchase plan.

Jeff Matthews has repeatedly pointed out the stock repurchase programs loved by Wall Street analysts often have severe negative long term impact on the companies with buy back programs. I think this is a graphic example.

Note: I do not have a position in SBLK.

Comments

[Chris B:]

"Jeff Matthews has repeatedly pointed out the stock repurchase programs loved by Wall Street analysts often have severe negative long term impact on the companies with buy back programs. I think this is a graphic example."

Exactly. Beware when management is focused on keeping investors happy rather than growing a long term, stable, and sustained business. GM, Ford, and Chrysler (pre merger) kept their shareholders happy for decades with dividend payouts - until the day when their equity was worth nothing. GE was buying back shares at high prices up until a couple months ago, at least keeping ex-shareholders happy. Now they're borrowing from Buffet at usurious rates just to stay solvent. I bet they wish they had those dividends and buyback funds now.

When financing costs rise or possible losses can be foreseen, the dividend needs to be the first thing to go. Investors insisting otherwise need to explain why they favor severely damaging their company just to get a few % of payout. It's kind of like selling the doors, plumbing, and light fixtures out of your house to pay yourself a few bucks.

2008 Dec 03 03:40 PM

[Dividend Gr...:]

The problem is not with dividend payments - the problem is that companies didn't allocate their cashflows wisely in order to be more competitive compared to their competitors. What is the guarantee that a company that doesn't pay any dividends will allocate the funds wisely?

How else are shareholders expected to earn some real cash from the companies they invest in? Sure, stock prices could rise and fall based off fundamentals, but there always is a disconnect between those. When a company shares a portion of its profits with shareholders, it proves that these profits are real, and not made by manipulating the books.
In the corporate america of the 21st century the shareholder is the last one to get paid. Companies that cannot afford to pay dividends are always suspect. If they cut or suspend dividends they show you zero confidence in the short-term ability to compete in the markets. If management doesn't think that the company will earn enough cash to support the dividend it has been paying for some time, then why should you hold the stock?

Google never paid a dividend, yet they had the funds to pay millions for a space challenge.. That's a missapropriation of shareholders money if you ask me!

2008 Dec 03 03:59 PM

[Boubou:]

DGI, this is my position also.
Companies which retain their shareholders profits are not more likely to produce corresponding share price increases.
They may very well use the funds for management compensation programs, initiatives which fail to increase value much of the time, or your funds may be lost due to external economic factors. Its a gamble.
A dividend is the only way to be sure of at least some compensation for the risk of owning a stock.

2008 Dec 04 09:04 AM

[elliot_mllr:]

Several points about SBLK:
1. The vessel that was the subject of the ICI bankruptcy is now earning about $25,000 on a short term charter, greater than the $10,600 claimed in the article.In addition SBLK received a $500,000 ballast repositioning fee.
2. While another bankruptcy of one of its charterparties would be unfortunate it would not necessarily cause SBLK to go under, contrary to what is stated in the article. SBLK has no newbuilds on order and a very low debt-to-asset value (about 57% of the pre-credit crisis values).
3. SBLK only used a very small amount of its buyback allocation to buy shares at $8. It has the vast majority of those funds available to buy shares back at $2.

2008 Dec 04 11:20 AM

[don't panic:]

Another way of looking at it is this:
1- They cut the dividend in half. I'd rather have seen them cut the dividend completely. Now is a great time for them to have cash to buy back shares and to purchase ships at a deeply discounted rate, or to use as a cushion in case the BDI crash prolongs (which I doubt, as the supply/demand fundamentals are still strong and short term issues like the Vale dispute and credit crunch will go away).

2- The other half of the dividend is a "share issue". Note that this is NOT the opposite of a share buyback. The opposite of a share buyback would be if they had issued stock in a secondary offering. The share issue mostly just shifts paper around, as shareholders effectively own the same % of the company.
However, this is ignoring the outstanding warrants. The share issue is a pretty sneaky way of devaluing the warrants (which I should mention, Star Bulk is aggressively buying back).

3- As long as their counterparties don't default, Star bulk is in a very strong financial condition and fairly underpriced.
There are other dry shipping companies out there that are in serious trouble... these are the ones with significant spot exposure. e.g. FREE
There is a big difference between Star Bulk and FREE.

2008 Dec 04 05:40 PM