- Eagle Bulk Shipping reports record net profits for the second quarter.
- Income statement & balance sheet trends point to more gains for shareholders.
- Investors can also use EGLE stock's 50%+ implied volatility to collect even more income through covered calls.
An Introduction To Eagle Bulk Shipping
We wrote about Eagle Bulk Shipping Inc. ( EGLE ) in December of last year when we stated that the company's very generous dividend was bound to attract the interest of income-orientated investors. Before we turn to the dividend, however, also in that December 2021 article, we spotted a potential symmetrical triangle (Bullish continuation pattern) which actually broke out of consolidation in February of this year. The break-out led to an incessant rally which resulted in shares of Eagle almost reaching $80 a share in June of this year. Elevated volatility however over the past few months has shares once more trading under $50 which means they are currently fighting to remain above their 200-day moving average. The one solace however is that shares have significant support above the $40 level (upper trend-line of the above-mentioned triangle) if indeed shares continue to lose ground in upcoming sessions.
The other area which definitely has the capacity to limit downside risk in Eagle is its dividend. The lower the stock goes, the higher the yield will grow all things remaining equal. Based on Eagle's most recent quarterly dividend payment ($2.20 per share), the shipper's forward yield presently comes in at approximately 18%. This yield is achieved with a conservative payout ratio (30%) (Well covered by net earnings). However, in order to really ascertain how strong Eagle's dividend is at present, let's delve into Eagle's key trends on its income statement & balance sheet. Suffice it to say, the healthiest dividend stocks are the companies with the most appealing total return potential.
Eagle Bulk Income Statement
Give n the sustained lack of profitability, Eagle has endured over the past decade, nobody could have predicted the transformation on the company's income statement in recent times. Net profit in the second quarter surpassed a record $94 million. The number was driven by revenues of almost $200 million buoyed by more available days and higher rates encompassing a net TCE of over $30k per day. Given how Eagle's earnings have soared, all of its main profitability metrics, such as return on assets, operating margins, etc., are obviously much higher than yesteryear. From our standpoint however and taking into account Eagle's generous dividend, net interest expense (A metric that potentially could affect the dividend) over the past four quarters only came to $24 million which is small change really compared to the shipper's operating profit of $340+ million over the same period. An encouraging sign.
The question going forward is whether this momentum can be sustained on the income statement. Top-line estimates for Q3 remain bullish but bottom-line revisions look to be on the wane from the fourth quarter this year onward. This means margins are expected to fall from present levels going forward which most bring down the dividend payout if realized. However, given where shares are trading at present from a valuation standpoint. notwithstanding the current dividend yield, a predicted fall in earnings should not hurt Eagle's shares in any significant way.
EGLE Balance Sheet
Liquidity and solvency numbers continue to improve in Eagle which is obviously beneficial for the sustainability of the dividend. On the liquidity side, current assets have closed to doubled (97%) since the bear market bottom back in April 2020 whereas current liabilities have risen by 48%. Cash (as a result of robust operations) continues to increase on the balance sheet. Suffice it to say, given Eagle's increasing working capital and the fact that it has access to a $100 million unresolved revolver, plenty of cash should remain to keep on paying that generous dividend.
On the solvency side, company debt came in at almost $377 million in the second quarter and shareholder equity rose above $765 million in the same period. Despite Eagle's improving financials encompassing a decreasing debt to equity ratio, interest rate risk in terms of payments on the company's debt has been nullified as a result of the company previously undergoing swaps in order to fix interest rate exposure. This refinancing brings stability to how the company will plan its spending going forward as well as reduce the interest expense on the income statement discussed above.
Boost Income Through Strategic Covered Calls
Although what we have discussed up to now looks very promising with respect to the base Eagle is currently working off, it will be future market conditions that will dictate how long Eagle can pay this outstanding dividend. Therefore our play here would be to sell out of the money calls against a long stock position to bring in even further income besides the dividend which obviously protects against downside risk even more. If the stock rallies, roll the calls up in strikes (by most likely going out in time). If the stock continues to fall, roll the calls down in strikes but simultaneously remain above the share price of Eagle. The bottom line here is that we want to always have short deltas above our long stock position. Furthermore, it is critical that credit is collected on every roll to ensure your cost basis for every cycle continues to go down. Remember, volatility in dry bulk firms like Eagle is always going to be higher than your regular blue-chip dividend stock. Use this volatility to your advantage by collecting rich premiums through covered calls.
Conclusion
Although shares of Eagle Bulk have had a poor couple of months, as long as trading conditions persist, we see little downside risk in this name. Although a contraction is forecasted in earnings going forward, it is not major, which leads us to believe the dividend will remain very strong for some time to come. We look forward to continued coverage.
For further details see:
Eagle Bulk Shipping: Total Return Potential Points To A Strong Sustainable Dividend