A Great Income Play on Chinese Growth
10/20/2011 9:00 am EST
Here’s one way to get involved in China’s long-term growth without having to place all your hopes on growth, as Mark Skousen writes in High-Income Alert.
The market has been extraordinarily volatile in the past few weeks. But our high-yield portfolio is holding up well…and paying us substantial dividends.
Let’s stick with this winning strategy. Today, I have a new recommendation for you: Seaspan Corp. (SSW).
Based in Hong Kong, Seaspan is one of the world’s leading charter owners of containerships. Most of its vessels are leased at long-term fixed rates.
When the company went public six years ago, it owned just six ships. Today, it has a fleet of 60. And it plans to keep growing aggressively to feed the booming transoceanic trade between Asia, Europe, and North America. It will own 69 ships by April, and it plans to purchase eight or ten more each year.
How has Seaspan expanded during a period of protracted economic softness? The reason is that containerized shipping has been growing at roughly 10% per year for more than three decades.
In essence, Seaspan is one of the big winners as a result of most countries’ huge trade deficits with China.
But can the company keep up the growth? I believe it will, for two primary reasons.
- 90% of its revenue comes from China. Even during this period of global economic weakness, China is still experiencing heady growth, and has even taken steps to slow its economy down.
- Seaspan secures long-term contracts with customers before it orders new ships. That has allowed it to weather the economic contraction of the past few years. Seaspan also does a thorough credit analysis on customers to minimize any defaults.
Then there are the numbers. Quarterly revenue—thanks to its growing fleet—is up 37%. I expect Seaspan to earn about $1 a share this year, and more than $1.60 a share next year. That means the company is cheap at less than eight times prospective earnings.
The stock also yields 5.5%. And I believe the dividend may double in the year ahead. In short, this is a high-quality, high-yielding play on Chinese import and export markets.
So pick up Seaspan and place a protective stop at $9. If you prefer to play this one more aggressively, try the February $12.50 calls.