Seaspan: High income in container shipping

The operator's preferred shares carry low risk and a nice yield.

By TheStockAdvisors Jan 23, 2012 2:00PM
Image: Cargo ship (© Image Source/Corbis)By Paul Tracy, High-Yield International

Shares in container ship operator Seaspan (SSW) jumped 20% after the company announced a tender offer to buy up to $150 million worth of common stock for $15 a share.

The 10 million shares repurchased as part of this deal represent about 15% of the outstanding float of stock, a significant repurchase. The buyback is a sign of management's confidence in the long-term prospects for the company.

Seaspan common shares have been weak this year, primarily due to concerns about the container shipping industry. Container ships are used to ship consumer and industrial goods over long distances, such as between China and the U.S., or China and Europe.

The company is one of the world's largest container ship operators, with a fleet of more than 70 vessels. The global economic slowdown this year is expected to reduce trade flows at least temporarily, and that means there's less demand for container ships.

With demand slowing and supply growing, there have been legitimate concerns about a weakening in the rates container ship firms charge to lease their ships. But none of this is a problem for Seaspan; its ships have signed five- to 20-year contracts that guarantee fixed rates regardless of container market pricing. Only four of those 70 contracts are due to expire in 2012, so Seaspan has very little exposure to near-term rates.

Management's decision to repurchase stock suggests it's comfortable with the cash flow from its current long-term contracts. Even better, Seaspan Preferred C Cumulative Redeemable Perpetual Preferred Shares (SSW-C) offer a fixed quarterly distribution equal to 9.5% of their par value of $25. That works out to $0.60 per quarter, with the most recent payout on Oct. 31, 2011.

Companies can cut dividends paid to common shareholders with relative ease if market conditions worsen. But the same is not true of preferreds; Seaspan has to make its full scheduled dividend payments to holders of the preferreds before it can pay a dime to common shareholders. In addition, if the company misses a payment, it must make up that missed payment in a future quarter.

These additional protections for preferred holders explain why the Series C preferred shares have been far less volatile than the underlying common shares of Seaspan.

While the stock buyback has no direct impact on the preferreds, it's seen as a vote of confidence for the company as a whole, and the preferreds rallied alongside the common in early December.

The biggest risk to Seaspan Preferred C is a prolonged slump in containership demand that lasts through 2013, when a larger portion of Seaspan's fleet is up for contract renewal.

Seaspan would need to be at risk of bankruptcy before the dividends on the preferreds would be threatened.

Overall, Seaspan Preferred C shares offer a solid yield with low price risk and volatility, making them a suitable play even for more conservative investors.

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