EGLE - Eagle Bulk: Cheap Bulker With Decent Dividend

2023-08-07 03:20:10 ET

Summary

• Eagle Bulk is a US-based dry bulk ship owner with a fleet of 52 modern vessels.
• The company is a dividend stock with a reasonable valuation, but carries risks related to its debt.
• The development of the dry bulk freight rates imposes challenge in the future.

Introduction

Eagle Bulk ( EGLE ) is a US-based dry bulk ship owner. The company owns and operates a fleet of 52 vessels with an average age of 10 years. All Eagle's vessels belong to Ultramax/Supramax category with a dead-weight-tonnage capacity of 55-63 DWT. This enables the company to operate in all bulk trade product categories. Sizewise the company's annual revenue was $719.8 million in 2022 and the balance sheet's total assets were $1.2 billion as of 30th of June 2023.

Investment thesis

Eagle Bulk is a dividend stock with a reasonable valuation. The main risks are related to the debt the company is carrying. Dry bulk shipping companies were able to capitalize on 2021 and 2022 extreme freight rates and gather significant cash positions which companies were able to use to pay debts, order new ships, or pay dividends. In the best scenario, the shipper was able to do all of these. Eagle Bulk has been able to pay reasonable dividends also after the freight rates have cooled. In October 2021 Eagle Bulk decided to launch quarterly dividend program in which it pays 30% of its net income as dividends with a minimum payment of $0.10 per share. So far the company has been paying the minimum amount only once in May 2023. Eagle Bulk has just released Q2 results for 2023 and declared a dividend of $0.58 per share which brings the dividend back to a reasonable level. As valuation has remained cheap, Eagle Bulk is a stock to be considered for an investor that looks for exposure in the dry bulk shipping market that wants income at a reasonable price.

Dividends

Thanks to inflated freight rates, Eagle Bulk was able to pay a high dividend of $2.00 per share in late 2021 and 2022. As the market has slowed down these high dividends are not realistic anymore. Seeking Alpha's Quant gives A+ grade for Eagle's dividend yield but in my opinion, the rating is a bit misleading as a trailing-12-month dividend yield of 10.42% is likely not realistic with current freight rates. The company just declared a dividend of $0.58 per share from Q2 2023. If the company is able to hold the dividend at $0.60 per share also in Q3 distribution (Q3 is distributed during Q4), the full-year dividend yield will stand at 4.17% with a share price as of 4th of August 2023. Under current market circumstances, a forward-looking dividend yield is acceptable for a dry bulk shipper.

Balance Sheet

Eagle Bulk's cash position is good and enables the company to operate and pay dividends to shareholders. The main challenge is related to the relative amount of debt on Eagle's balance sheet. In a high-interest rate and low freight-rate environment, too much debt on the balance sheet may materially decrease a company's ability to deliver dividends. When Eagle Bulk is compared to one of its main competitors, Genco Shipping ( GNK ), we can see that the total debt-to-equity ratio is 42.86% for Eagle and 17.09% for Genco. This means that the risks related to refinancing and interest rates are significantly higher for Eagle when compared to Genco Shipping. The positive thing regarding the debt on Eagle's balance sheet is the maturity profile. The majority of the debt will mature as late as 2028, which gives time for the company to decide how it will handle it. The convertible bond maturing in August 2024 is only $104.1 million, and the company could pay it with the cash it has in the bank as of 30th of June 2023.

Valuation

The valuation is the best part of Eagle Bulk's investment story. Traditional valuation metrics look really good. Price-to-earnings ratio on a trailing-12-month basis stands at 3.44 which means that the company can generate net income to fulfill its market capitalization only in 3.4 years if the company is able to hold its current profitability. Eagle's P/E is better than its main competitor, Genco's P/E stands at 5.2.

The price-to-book ratio is also low for Eagle Bulk, it stands at 0.73. This means that the total assets of the company are more valuable than the company's market capitalization. Hypothetically, the company could sell all its vessels, pay debts and share the remaining cash with shareholders and owners would make money. However, investors must remind that low P/B values are typical for ship owners and it is not guaranteed that the market will ever value ship owners based on its book value.

All traditional valuation metrics look relatively good for Eagle Bulk and Seeking Alpha's overall valuation grade stands at A+.

Risks

The development of a bulk cargo market is the major risk Eagle is facing. The slowdown in the global economy, geopolitical tension, and decreased freight rates are all affecting Eagle's ability to make a profit and pay dividends in the future. Eagle Bulk sees future demand positively and according to their corporate presentation (which cites Clarksons Research) dry bulk cargo market is expected to grow in 2023 and 2024. However, investors still need to take such expectations with a healthy skepticism.

Eagle's debt position was discussed above and that is definitely a risk that the investor must remind while evaluating investment into Eagle Bulk. I'm not going to discuss debt anymore, I want to highlight a medium- to long-term risk that touches the whole ocean cargo industry. This risk is regulation. The global community has been fighting climate change for decades and maritime shipping can expect emission regulations to get tighter in the future. These future regulations may affect the whole fleet of Eagle Bulk and it is hard to estimate if the current vessel portfolio is sufficient to meet regulations in the next 5 to 10 years.

Conclusion

In conclusion, Eagle Bulk is a dry bulk vessel owner that is reasonably valued and has a clear, easy-to-understand dividend policy. Even when the company has relatively more debt on its balance sheet than Genco Shipping, Eagle Bulk is still a good stock to be considered for an investor that wants exposure in the dry bulk shipping market. Thanks to reasonable valuation and clear dividend policy, Eagle gets BUY suggestion.

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