Seaspan: High Seas, High Yield

06/15/2015 9:00 am EST

Focus: STOCKS

Chloe Jensen

Chief Analyst, Cabot Dividend Investor

The latest addition to the high yield portion of our model portfolio is a container ship leasing company based in Hong Kong, explains income expert Chloe Lutts Jensen, editor of Cabot Dividend Investor.

Seaspan (SSW) currently operates 78 container ships and reported 99% utilization at the end of the last quarter. Revenues are highly predictable thanks to its emphasis on long-term charters.

The company has an average of five years remaining on its current contracts. Revenues have increased in each of the past five years as Seaspan has gradually increased the size of its fleet.

Growth comes from adding new vessels to the fleet. Seaspan will take delivery of 17 new ships between now and the end of 2017 and 14 of them are already chartered.

Seaspan's business model includes taking on high levels of debt to finance construction of new ships, so the company remains credit-sensitive.

Since 2009, Seaspan has raised the dividend every year, with each boost averaging a generous 29%. The payout ratio based on EPS appears to be an unsustainable 167%, however, the company's cash available for distribution easily covers both the common and preferred dividends.

The stock has fallen 18% off its highs in the past 12 months and currently yields 7.5%. The company's credit sensitivity creates high risk, but its predictable income stream makes this an appealing option for risk-tolerant investors whose priority is current income.

For risk-averse investors, Seaspan's preferred shares present an attractive alternative to the common stock. The company has three classes of preferred shares outstanding.

The C shares are callable in January 2016, but the D and E shares are both good options for new investors.

The D and E preferreds both have a par value of $25 and have no maturity but are callable in January 2018 and February 2019, respectively.

Both issues are currently trading slightly above par. The D series, which has a coupon rate of 7.95%, is currently yielding 7.66% (6.3% yield to call), while the E series has a coupon rate of 8.25% and is yielding 8.08% (7.5% yield to call). The E shares are more liquid.

Preferred share ticker symbols aren't standardized, but you can usually find these under a symbol such as SSW-E, SSW-PE, SSWPRE or SSWpE for the E shares, replacing the E with a D for the D shares.

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