9% Yield, But You'll Have to Work for It

02/14/2011 12:55 pm EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

Seaspan’s preferred shares offer a rich, safe payout from a steadily growing business, writes Jack Adamo of Insiders Plus.

Our positions in Seaspan (NYSE: SSW) common stock already attest to my faith in this company. During the market crash, the market treated the stock as if it were an average ship-leasing company. Of course, it isn’t. Seaspan leases ships only on long-term charters and only with the strongest companies in the world. It trades the possibility of bigger gains for steadier, more dependable returns. [Elliott Gue recommended Seaspan’s common shares three weeks ago at 10% below the current price. —Editor.]

We will get more of the same with the new preferred. Seaspan Series C 9.50% Cumulative Preferred (NYSE: SSW-PC) is for all intents and purposes a six-year bond disguised as a preferred stock. To meet bank debt covenants, the company has to have a certain ratio of debt to equity on all new ship purchases. This preferred issue allows the company to meet that obligation without causing long-term dilution to common stockholders.

It may lower the available dividends while the issue is outstanding, but the shares are redeemable in 2017 and the company has a strong incentive to do so. The dividend increases after that date. This tells me the company has every intention of redeeming the shares; hence my comparison with a six-year bond.

Preferred stock is lower in the capital structure than bonds, but if I thought that had the slightest chance of being a problem we wouldn’t have a single position in Seaspan, much less the three we’ll have after today. It is also comforting that if interest rates start to steadily rise over the next few years, this issue will be shielded from the long-term effects of that, unlike an open-ended preferred which would fall in value as interest rates rise, due to competitive newly issued instruments.

Shooting Above Par

One sticky wicket is that the shares are selling above par of $25. The shares closed Friday at $26.37. That means when the shares are redeemed at par, your total return will be lessened. The effective dividend rate at the current price is 9.0%, not the stated 9.5%.

The shares are only a couple of weeks old and the whole market is a bit frothy at the moment; so we’ll take a small position today with a very limited price range. If the shares slide a bit after the excitement of the initial offering wears off and/or the market takes a nap, we’ll buy more. If the stock continues to rise, I’ll just raise the buy range to the maximum I have in mind.

It is possible that when the “risk trade” abates the market will again crave dividends and bid up the premium on these shares. In that case, we might be able to sell them down the road for a capital gain.

Buyer Beware

The float is very thin on this issue, only 10 million shares, so there could be a large bid/ask spread. Buy these shares only with a limit order, never a market order. Start with what the stock closed at Friday ($26.37). If you don’t get it in a few minutes, see where the last trade was and if that price is within our buy range, put in a bid near that amount. Even if the stock looks like it's taking off, don’t bid above our $26.50-per-share limit.

This is a new issue and a very small one. It could be vulnerable to manipulation by market makers. The offering investment bankers probably have “over-allotment” shares they’re holding back and looking to sell if they can bid the stock up for a short-term pop. Caveat emptor.

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