Analysis of Safe Bulkers (SB) 2nd Quarter Results

Safe Bulkers (SB) reported 2nd quarter financial results on Thursday July 21st, 2011.  Their board of directors declared a continuation of the $0.15 quarterly dividend. 

The dividend is payable on or about August 31st, 2011 to shareholders of record at the close of trading of Safe Bulkers common stock on the NYSE on August 24th, 2011. Safe Bulkers has paid a $0.15 quarterly dividend since it’s 2008 public offering.  They haven’t established themselves as dividend growers, but the dividend yield of 8.3% is tremendous ($0.60 annual dividend / $7.21 share price).

Safe Bulkers dividend is still safe even in this horrible drybulk shipping market brought on by the global recession created by Keynesian central bank monetary expansion.  SB earned $0.27 per share this quarter and paid a $0.15 dividend.  The dividend payout ratio rose to 55.5% from 38.7% in 2010.  I don’t like to see the dividend payout ratio to rise unless the dividend is increased.  But this increase in the dividend payout wouldn’t worry me until it approaches 90%.  SB paid the same $0.60 annual dividend while earning an adjusted $1.55 in 2010.  The company conducted a 5 million share equity offering since 2010, so the $1.73 2010 EPS needed to be adjusted downward.

This year’s annual earnings are on pace to be the lowest in the history of the company.  Safe Bulkers has earned an average of $1.90 per share over the past five years (adjusted for changes in capitalization due to share increases).  SB earned $0.41 in the first quarter of 2011.  It earned $0.27 this quarter.  Some faceless, nameless analysts expected earnings of $0.37 per share according to Reuters financial website.  Therefore, the financial press considered this quarter a earnings miss.  Let’s assume that SB only earns 90% of it’s 2nd quarter earnings in the 3rd and 4th quarters.    With these conservative assumptions the company would earn $1.16 per share.  This would bring the six year average EPS (adjusted) down to $1.84.  Safe Bulkers remains an extreme value stock trading at 3.92 average earnings including my hypothetical earnings estimates for the remainder of the year.  Consider buying SB below $22.08 per share (12 times average adjusted earnings).  Consider selling SB above $36.80 (20 times average adjusted earnings).  This high dividend stock is so cheap compared to other stocks!!

Coca-Cola (KO) trades at around 26 times average earnings.
Pfizer (PFE) trades at around 18.2 times average earnings.
Proctor & Gamble (PG) trades at around 16 times average earnings.

Safe Bulkers has 16 ships in it’s operational fleet.  The fleet’s average age is 4.4 years.  There are another 11 that will be added to the fleet over the next three years.  The company’s average time charter equivalent (TCE) rate (think of as revenue per ship per day) was $27,921 in this quarter.  Estimated 2011 revenue = 16 ships x 361 operational days (99%) x $28,000 TCE = $160 million.  Only 23% of the fleet is rented out on the abysmal spot dry bulk market characterized by the Baltic Dry Index.  So only a small portion of SB’s revenues are affected by the current market. Their fleet is contracted out at 59% in 2012 including the new ships joining the fleet.  If you are considering a purchase of Safe Bulkers, then you must monitor the Baltic Dry Index weekly (note: the BDI has taken a huge hit in the past three years due to the massive drop in the capesize rental prices.  Capesizes are the biggest ships.  SB owns very few of them, so the BDI can lose a larger percentage than SB’s TCE in the same amount of time.)

Balance sheet (improving slightly)
Shareholder equity increased by $65.6 million.  Nearly $40 million of the additional equity came from the equity offering.

Companies with current ratios above 2.0 and a quick ratio above 1.0 are usually financially sound.  They have enough current assets to cover their current liabilities more the twice over.  The quick ratio measures cash on hand divided by current liabilities.  SB’s current ratio dropped from 2.0 to 0.62 and their quick ratio dropped from 1.9 to 0.5.  The company’s current ratio and quick ratio decreased due to spending money on advances to shipyards building their new ships.  These ratios should increase back to excellent levels once the new ships start producing revenues.

Conclusion: Safe Bulkers earnings miss will create an opportunity for high dividend stock investors who have done there homework to buy this excellent company at a low price.

Disclosure: I don’t own Safe Bulkers, but I would like to.
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Published in: on July 25, 2011 at 12:45 pm  Leave a Comment  

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