Safe Bulkers: Safe 9% Yield Bulking
Summary
- Safe Bulkers is benefiting off of rising charter rates, which amid decreasing financing costs could lead to record net income levels in 2021.
- The common stock is trading at a very humble valuation compared to its industry peers, making it worth holding considering its improving underlying performance.
- Despite this, the common stock is indeed risky, lacking prospects for tangible capital returns.
- Either as a hedge to the common stock or a standalone source of income, the preferred shares yield a juicy 9%, which is well-covered by EBITDA, adding a layer of predictability that the common stock lacks.
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Elevator pitch
With the globe slowly but gradually coming out of the COVID-19 pandemic, charter rates for dry bulk carriers have been improving, benefiting companies in the industry such as Safe Bulkers (NYSE:SB). The company has been growing its fleet, managing its debt prudently, while management's ~50% shareholding aligns its interests with common shareholders. Charter rates have had an excellent start entering 2021, which should result in Safe Bulkers delivering robust cash flows this year as well.
The common stock, while risky amid a variable rate environment in terms of charter rates, is likely subject to a decent upside amid a relatively humble valuation. To reduce the underlying risks attached to holding the common shares, investors can combine (or hold individually) the company's 9%+ yielding preferred shares. The preferred shares not only provide a hefty yield for income-oriented investors in the currently yieldless world, but also the predictability of their cash flows makes for a good hedge against the common stock too.
The business
Safe Bulkers is a relatively small player in the dry bulk transportation business, owning 42 dry bulk vessels with an aggregate capacity of 3,862,000 DWT (deadweight tonnage).
The company's vessels are used to transport bulk cargoes, particularly coal, grain, and iron ore, worldwide. Dry bulk companies charter their fleets primarily through 2 ways: Time charters and Voyage charters.
Unlike voyage charters, which are contracts to carry a specific cargo from a load port to a discharge port, a time charter is a contract to charter a vessel for a fixed period of time at a set daily rate and can last from a few days up to several years. The vessel performs one or more trips between load ports and discharge ports. Under time charters, the charterer pays for most voyage expenses related to the cargoes, while the shipowner (Safe Bulkers) pays for vessel operating expenses (e.g., crew costs.)
Safe Bulker almost exclusively engages in time charters, which add an extra layer of cash flow predictability, as revenues do not wildly fluctuate due to its multiple, short-term voyage charters at various rates/spot prices.
Recent performance
The company's financial performance is directly related to the charter market conditions, which dictate the rates Safe Bulkers can charge its charterers. Rates can be extremely volatile, governed purely by the underlying supply/demand for dry bulk transportation.
As you can see, daily charter rates improved dramatically from the initial stages of the pandemic. Additionally, so far, in 2021, rates have also been quite juicier compared to last year. Still, these figures can fluctuate wildly within just a couple of weeks/months, as the graphs display below.
As we mentioned earlier, because Safe Bulkers' fleet is chartered under time charters instead of voyage charters, its revenues are smoother than the market's spot rates. The company's charters generally have an average remaining charter duration of around five months. While not a long period of time, with 42 vessels of various sizes, the company can manage to smooth out its TCE ( Time Charter Equivalent rate) performance, as shown below.
Source: Company presentation
Despite the impact of COVID-19 on the company's Q1 and Q2 rates, as shown above, annual revenues for FY2020 were almost identical to that of last year, displaying the company's ability to smooth out TCE fluctuations.
Additionally, you may have already spotted that the company delivered a net loss for the year of around $12.9 million - however, this due to one-off fleet repositioning expenses during Q2. What's a more meaningful figure, in our view, is the company's quarterly net income generation, which despite lower quarterly revenues by 2% actually grew YoY amid lower interest expenses.
Source: Earnings release
Over the past couple of quarters, the company has been deleveraging, which is quite a feat considering the weak first half of the year. Seeing interest expenses and indebtedness moving lower, coupled with rates having an excellent early 2021, we believe that the company's profitability is set to potentially hit record levels at the end of the current financial year.
Why holding the common stock is worth it
We just mentioned the potential for record profitability levels at the end of the year. Of course, the market is well aware of such a possibility, which is the reason shares have rallied massively over the past year after trading at under a dollar at some point.
Source: Google Finance
As you can see, despite the stock's rally, Safe Bulkers is trading at only 6 times its forward EV/EBITDA - a valuation considerably lower than its industry peers (Dry Bulk).
From a pure valuation standpoint, and considering the company's growing performance, Safe Bulkers should be worth holding for the valuation expansion potential alone.
In terms of capital returns, the company has not paid out a single common dividend since 2015 amid an unfavorable industry environment. When management was asked about a potential dividend due to the company's growing profitability prospects in the Q4 conference call, they answered (long-story-short) that a dividend would only be considered after the company's profitability/business environment was to stabilize first.
Based on the guesswork on management's answer (which you can, of course, assess yourself), we believe that no dividend should be expected anytime soon.
With management holding around half the shares outstanding, it makes sense that as much as it would like to receive a dividend payment, it also wants to make sure the company's longevity and long-term viability remain intact, which is quite prudent if we are to examine it from that perspective.
The preferreds - buy the 9% yield
From a valuation standpoint, Safe Bulkers is definitely quite attractive. However, charter rates are quite unpredictable, and the industry is generally very cyclical. Companies can undergo a prolonged period with no tangible capital returns, as has been the case of Safe Bulkers since 2015.
For investors to increase their margin of safety and reduce their overall exposure to the more unpredictable common stock, the preferred shares (SB.PC) (SB.PD) make for a great hedge. Of course, the preferreds can be bought individually without the common stock for pure income generation.
Safe Bulkers has two series of preferred shares outstanding, whose characteristics can be seen below:
Source: Preferred stock channel
Both preferreds yield around 9%, while their characteristics are almost identical, excluding share count. They both trade post their call dates and at a discount to par, which means that investors are subject to capital gains in a potential redemption.
While most of the times shipping preferred stocks tend to trade post their call dates, with little to no chances of getting redeemed amid lack of funds, Safe Bulkers did redeem its Series B back in 2018.
The fact that management has not yet redeemed Series C and D implies that it probably hasn't found another, cheaper financing alternative. This is not the best news in the world, but not terrible either. It's well known that financing is expensive in the industry compared to other markets. If anything, income-oriented investors can take advantage of this to buy hefty yield that comes with the preferreds.
From a coverage standpoint, the preferred dividends are well covered by Safe Bulkers' adjusted EBITDA, along with interest expenses. The company kept paying its preferred dividends with no interruptions, even during the past few years, when it was really struggling. 
Source: Earnings release
Hence, we believe that the preferred shares make for a great income-producing source in the current environment of ultra-low yields.
Still, a considerable risk worth mentioning is that the preferred shares have very low volumes, of just a few thousand shares changing hands per day, which can be a deal-breaker for many.
Conclusion
Safe Bulkers is not the biggest player in town when it comes to dry bulk carriers, but it's one that has been relatively well-managed, with massive insider ownership.
While COVID-19 did disrupt global charter rates, along with the company's TCE in the first half of 2020, revenues remained stable year over year. Further charter rates have had an incredible run entering 2021, which should lead to the company ending the year with record net income levels.
We believe that the stock is quite cheap from a forward EBITDA standpoint compared to its peers, which makes it an attractive pick against its industry peers - yet a risky one.
Due to the element of speculation being strong when it comes to shipping companies, their revenues, and net income levels, investors can hedge their stake with Safe Bulkers' preferred shares. The preferreds yield around 9%, which makes them quite an attractive pick in the current market environment, even as a standalone source of income. Their dividends are well-covered, adding an element of predictability, hedging one's exposure against the common stock as well.
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This article was written by
Hi there!
I hold a BSc in Banking and Finance. Here, on Seeking Alpha, I cover a variety of growth stocks and income stocks, including identifying those with the highest expected return potential, and a solid margin of safety.
Currently contributing as Promoting Author to the "Wheel of Fortune" marketplace.
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Happy investing!
Nick
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (35)
The operative word being "fairly", as no dividend in any company is safe.Even SFL, which does have an average charter contract duration of more than 7 years, and a backlog of over $2.3 billion has proven that it is not safe. Best regards
Lasse
Nick
Thank you for the idea and info.
Moreover:
1. Half of fleet vessels have scrubbers that produce huge revenues (about 4.500 usd/sailing day at current bunker prices for kamsarmaxes). We have about 220 sailing days per year. Scrubber revenues will increase even more as we move out of covid and demand for distillates increases.
2. Capes are only 4, of which 2 are in 10-year charter period in very favorite terms and the 3rd has scrubbers.
3. IMO regulations for 2023 and 2030 are/will affect existing fleet positively (low orderbook, reduced speed for vessels with high fuel consumption). Most of the vessels are japanese-made.The current very high Kamsarmax/Panamax and Ultramax/Supramax freight rates are due to disruptions in production and supply lines. For example, China had to import large quantities of grains. If you go for the common stock you have to be diligent for possible inverse of these trends in the next few months.
For medium term investors, there should be no worries for 2022 and 2023 as orderbook is minimal.