2 High-Yield Dividend Monsters To Strike Down Stagflation

The pandemic led to a surge in consumer demand and spending for goods that required shipping from abroad. Customers are absorbing price increases, and as stagflation mounts, this slowing in economies could result in poor performance for many industries, including a slowdown in demand for shipped goods.

Asian ports ease lockdowns for business as usual, backlogs have started to work themselves out following some of China’s largest ports, and industry layoffs turned into economic slowdowns. Now, the world is facing new challenges on the heels of stagflation and recession fears. In a Seeking Alpha article titled Inflation or Lockdown Whiplash? Keith Weiner writes:

“The problem for the shipping industry – and indeed the whole supply chain – is that it is designed for a steady rate of demand. It is not robust to a prolonged shutdown followed by a spike. Even though total goods bought, manufactured, and shipped may be the same, the industries involved were first laying off workers, going bankrupt, never to return, shutting down marginal plant, etc.”

Supply chain disruptions support continued and consistent revenue production. Yet, shipping stocks have been big losers in recent weeks because of diminished demand following stagflation and recession fears, which could equate to a lack of revenue growth.

Although shipping is experiencing some cooling, rates are still double the $3,070 paid one year ago. Concerns that consumer spending amid inflationary pressures will disrupt and impact shipping prices and rising inventory rates are helping to bring down costs, according to Lee Klaskow, Bloomberg Intelligence Senior Transport Analyst.

CPI surged to 9.1%, a high not seen in 41years. Although the demand for goods is starting to slow, investors are turning to high-yielding stocks to battle inflation and losses in their portfolios. And while shipping stocks peaked – like many sectors – around April and May, my two shipping stocks maintain their Strong Buy ratings, possess great valuation frameworks, and are still paying handsome dividends.

Investing in Shipping Stocks with High Dividend Yields

Ocean carriers are posting near-record results despite recent declines, and they anticipate strong numbers for Q2, according to Freightwaves.com. Although congestion in ports around the globe has increased costs and concerns, the shipping industry has many advantages, including transporting goods in large volumes. According to the International Chamber of Shipping, “Some 11 billion tons of goods are transported by ship each year. This represents an impressive 1.5 tons per person based on the current global population,” and the increase in seaborne trade is predicted to rise substantially through 2030.

While a slowdown in production could occur if stagflation or recession takes place, it seems rather certain that this sentiment is already discounted into stock prices. The need for the transfer of goods and materials should make for a recession-resilient investment in our two stock picks, GOGL and SBLK. Both possess excellent dividend metrics and offer a hedge against inflation.

Golden Ocean Group Limited (NASDAQ:GOGL)

• Market Capitalization: $2.18B
• Quant Rating: Strong Buy
• Quant Sector Ranking (as of 7/19): 31 out of 613
• Quant Industry Ranking (as of 7/19): 6 out of 24

Dry bulk shipping company Golden Ocean Group Limited (GOGL) operates and transports fleets that contain bulk commodities like ores, coal, grains, and fertilizers. Continued demand for agricultural products, fertilizers, and coal following commodity shortages and supplies in the Eurozone put GOGL on solid footing. And while some of the commodity rallies this year have turned bearish, GOGL continues its upward trend with stellar momentum, giving investors a reason to actively purchase shares, which drives the stock’s price higher. Year-to-date, the stock is +11.63% and +17% over the last 52 weeks. The company’s quarterly price performance showcases GOGL’s steady outperformance of its sector peers. In addition to excellent momentum, GOGL comes at a severe discount.

GOGL Stock Valuation

Possessing an A+ overall grade for valuation, GOGL is severely discounted. GOGL’s trailing P/E ratio of 3.48x is 80% below its sector peers, and its trailing PEG ratio is a -98.92% difference to the sector. If the company’s price point is insufficient to convince investors of this strong buy, let’s look at Golden Ocean Group’s growth and profitability.

GOGL Growth & Profitability

A monster dividend yield and demand for shipping have led to Golden Ocean’s tremendous growth. GOGL has beat top- and bottom-line earnings for five consecutive quarters, recently resulting in two FY1 analyst upward revisions. EPS of $0.53 beat by $0.16, and revenue of $208.91M beat by more than 75% year-over-year. Not only does the company maintain excellent operating cash flow, but its A+ profitability and increasing cash from operations benefits shareholders looking for regular passive income.

“Golden Ocean hedged Q1 and delivered a solid net profit of $125 million. Golden Ocean has refinanced part of the debt and lowered our already industry-low cash breakeven…for Q2, we have secured around 78% of our available vessel base at around $28,000 per day net…Despite a slowdown in economies around the world, the 30-year low order book means that fundamentals remain in place for continued strong freight environment. –Ulrik Anders, GOGL CEO.

Although GOGL maintains a robust balance sheet with top and bottom-line earnings beats, the company has taken precautions given the current economic headwinds and outlook and cut its dividend from $0.90 to $0.50/share quarterly. Although the company cut its dividend, it still possesses a monster 18.42% forward dividend yield. Overall dividend growth is attractive with an A- grade, and GOGL is taking precautions for the uncertain future.

Having refinanced debt and lowering its already industry-low cash breakeven, a substantial portion of net profit continues to be paid to shareholders, with longer-term fundamentals and outlook in mind. The executive team is implementing strategies that hedged profits and commercial strategies from Q1 to allow for more exposure to various fixed contracts and better possible market conditions in Q2.

“We have taken up 15% of our Cape days at $38,500 per day and 33% of our Panamax days close to 35,000 per day. As it appears, we are focused on securing Panamax days simply because the pricing in the last few months has been much more attractive for Panamax’s than for Capes. We always balance our commercial strategy between the segments to extract maximum value at the lowest risk. We will focus on cash flow generation. Through well-timed acquisitions, economies of scale, and access to competitive finance, we have achieved industry low cash breakeven, as already laid out…Golden Ocean stands to generate more than $500 million in free cash over the next 12 months,” said Anders.

Dividend Safety is at the forefront of most investors’ minds, and this stock has a stable Dividend Safety grade of C. However, the Dividend Consistency grade of D+ is unnerving for many investors as history has shown there is volatility.

Can Golden Ocean maintain its dividend? The stock has declined so much from its 52-week high that there may be minimum stock price destruction if the dividend rate is reduced. There has been no indication from management that this will be the case. Accordingly, with its strong outlook and quantitative metrics, I believe GOGL and our next stock pick is in a great position to buy for portfolios looking to hedge against inflation.

Star Bulk Carriers Corp. (NASDAQ:SBLK)

• Market Capitalization: $2.52B
• Quant Rating: Strong Buy
• Quant Sector Ranking (as of 7/19): 17 out of 613
• Quant Industry Ranking (as of 7/19): 4 out of 24

Like GOGL, Star Bulk Carriers Corp. (SBLK) is a global shipping company that transports bulk materials, including iron ore, coal, grains, fertilizers, and steel products. Because many of these items are essentials, the ever-increasing demand and need for these hot commodities give this stock a protective moat, which is why SBLK is rated a strong buy.

SBLK’s Factor Grades and quant ratings below characterize the stock’s value, growth, profitability, momentum, and EPS revisions compared to the same metrics for other stocks in its sector.

SBLK Stock Quant Ratings and Factor Grades

Not only is SBLK trading below $30 per share, but its forward P/E ratio of 3.31x is also a -79% difference to the sector, and its trailing PEG ratio is -99.50%.

SBLK’s quarterly momentum showcases its outperformance of its sector peers. When comparing six-month, nine-month, and one-year price performance, SBLK’s long-term bullish trend complements its A+ growth and profitability.

SBLK Growth & Profitability

Over the last six months, SBLK’s share price has increased nearly 20%, and the stock has had excellent earnings results. As I previously wrote in 3 Best Shipping Stocks to Buy Amid the Global Shipping Crisis:

“SBLK has experienced the evolution of adjusted net income and adjusted EBITDA, the latter growing more than 10x over the last eight quarters to demonstrate its substantial operating leverage. Following its recent Q4 earnings beat, SBLK increased its dividend by 60%, which prompted its stock to rally +6.6% post-market. Star Bulk has a solid 25.80% forward dividend yield, which is substantial compared to the industry average of 0.6%.”

And despite a cut to its $2.00 dividend of 17.5%, the company’s overall dividend grades are solid, along with its monstrous 26.94% forward dividend yield. Despite a strong balance sheet, SBLK’s executive team is proactive in its dividend payout by recognizing the increases in fuel and freight prices and working capital and making the appropriate adjustments.

“Given the recent rally in the market and the increase in bunker prices, we currently estimate that our working capital will increase by approximately $40 million in the second quarter of 2022, negatively affecting our cash balance at quarter end and our dividend for the quarter by approximately $0.40 per share. This is a timing difference driven by the difference between when earnings are recognized and when cash comes in, and it will reverse at some point in the future.” –Simos Spyrou, SBLK Co-CFO.

The continued demand for shipping coupled with the price of commodities and charter rates should allow SBLK to thrive. Q1 2022 EPS of $1.72 beat by $0.32, and revenue of $307.48M saw a near 92% year-over-year increase.

Because many shipping stocks have very low P/E ratios and my picks offer tremendous dividend yields and passive income in the form of dividends, SBLK and GOGL are excellent buys for the current environment. If you’re looking for a hedge against inflation and a value and growth stock all in one, consider SBLK and GOGL.

High-Yield Shipping Stocks for Value & Growth Investors

GOGL and SBLK are very attractive stocks on value, growth, and profitability metrics. Both possess forward revenue growth above 20%, forward EBITDA growth above 40%, and trade at extreme discounts. Even factoring in inflation and potential economic declines, both stocks benefit from tailwinds that include consumer demand, even if there are some declines and price competition.

Where many investors are dedicated to finding discounted stocks that trade at lower prices relative to fundamentals like earnings, sales, cash, and book values, other investors seek growth opportunities. Star Bulk and Golden Ocean represent both value and growth. If you’re interested in other value or growth stocks, search our Top Value Stocks or Top Growth Stocks for ideas. Our tools help ensure your portfolio contains strong investments that increase over time.