Seaspan: High Income on High Seas

03/24/2015 8:00 am EST

Focus: STOCKS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

In our high income model portfolio, we own preferred shares and notes issued by a charter owner of containerships, explains income expert Jack Adamo, editor of Insiders Plus.

Seaspan (SSW) had a fair earnings report in its latest period. Normalized EPS per diluted share rose 3.7% in Q4, but fell 1.2% for the full-year. Normalized earnings have gotten a bit more problematic in the last few years.

The main driver of this measure used to be the fluctuation in currency and interest rate hedges, which I didn't mind at all.  But the company has gotten a bit more aggressive.

It no longer counts options compensation expense and a few others that are real expenses. It also excludes some one-time items that recur. I don't like these fictions, but everyone is doing it, so I guess the company feels it's entitled. My own figures show slightly lower results.

This is of small concern to us as preferred shareholders. More important is that net interest coverage from operating earnings was 4 times at yearend and EBITDA covered preferred dividends 4 times.

The company also raised the common stock dividend 9% and said in the conference call that the common dividend was sustainable. That's a good sign.

The call was upbeat about prospects and the company continues to expand its fleet. My only concerns are that management may be too upbeat for my taste and may be expanding too fast.

This won't affect ships already under contract, but if Seaspan's outlook is too optimistic, it may have trouble getting profitable rates on ships coming off charter in a weaker-than-expected economy.

The average length of the company charters is down to five years and change. When we first bought the common stock years ago, it was closer to eight years. Nonetheless, this is a problem for common stock holders, not us.

It is also encouraging that company insiders converted a lot of high-yielding preferred shares in 2014 (as scheduled), increasing the company's already very high percentage of insider ownership. These guys are definitely watching the ship.

We recommend Seaspan Corporation 7.95% Series D Cumulative Redeemable Perpetual Preferred Shares (SSW-PD) and Seaspan 6.375% Notes due April 2019 (SSWN). Both securities are buys on small pullbacks.

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