Why I'm Buying this Global Shipping Giant
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Europe is on the verge of economic collapse, China is in the midst of slowing down, yet I’m buying a company that makes its money navigating the stormy seas of global trade. I’m building out a portfolio of exceptional dividend paying stocks so that I can use the cash to buy exceptional growth stocks. I call this the “No Drip, No Mess” Portfolio, though today we might get a little wet with the next company I’m adding to the mix.
There are many ways to invest in global trade and investors should profit despite today’s macroeconomic headwinds. You could go with a dividend dynamo such as 3% yielding logistic giant United Parcel Service (NYSE: UPS) or go for the growth found in their smaller rival with a more meager payout, FedEx (NYSE: FDX). Don’t like their more consumer facing business models? Then you could look into another logistical direction by investing in Expeditors International (NASDAQ: EXPD). While UPS and FedEx own the planes and trucks, Expeditors is an asset light company just buying space on the assets. I think any of these companies would make great long term investments, but I am looking for big time dividends that are paid for by solid recurring revenue. What if you could take advantage of the benefits of asset ownership but reduce the risks of the macroeconomic headwinds?
Containership owner and operator Seaspan (NYSE: SSW) is in the business of chartering their boats long-term and at fixed rates giving their revenue much more stability than most investors realize. What investors also don’t realize is that Seaspan has nearly completed the build out their fleet of ships that are already under long-term charters. This means that capital spending will be going down, and its already large dividend will be rising. What this also means is that the real risks of any economic slowdown are on the shippers, and not Seaspan.
It’s these long-term, fixed rate charters that give investors the security to just sit back and collect the cash being shipped out every quarter. Seaspan currently has an average remaining maturity of seven years with just four maturities in 2012, two in 2013 and none in 2014. While Seaspan just has two boats remaining on their original new build program to be delivered this year, they are not done growing by any means. They have three boats now scheduled for delivery in 2014 and also have a JV with the Carlisle group for even more future growth. Between their own new building programs and thanks to their right of first refusal with the JV, the potential is there for up to 19 more vessels to be added to the fleet after 2014.
What’s even better is that Seaspan’s management is very focused on increasing the company’s long term value as they own a meaningful portion of the shares and are incentivized to grow the dividend. They’ve been engaged in several value enhancing transactions over the past year including completing a tender offer to buy back 11.3 million shares, which at the time represented over 15% of shares outstanding. In addition to this buy back they also bought back the manager of the company and the Class C common stock and finally announced another $50 million buyback. While most buybacks seem to destroy value as companies buy high, Seaspan was buying very low and its remaining shareholders have been rewarded.
Given the nauseating volatility in the market, especially in companies focused on global trade, the puts on Seaspan are paying very well, so we’re once again going back to this trusted strategy. The August $15 puts pay about 5% on the cash required to secure the trade so we’ll be writing two puts for a 3% allocation at this point. If we are able to pick up the shares come mid-August, we’ll be collecting a 6.67% dividend yield going forward. We’ll be content to hold the shares from there, possibly writing another put or two if the markets provide us with an opportunity to snatch shares even lower.
Once we get our shares it's possible I’ll look to write calls against them to generate additional income and possibly sell them at a current dividend yield of less than 4% (or $25 a share at the current payout). Though, the goal is to hold on to this company for the long haul as the dividend income should give us more than enough dry powder to invest in more exciting companies.
latimerburned has a covered call on Seaspan. The Motley Fool owns shares of Expeditors International of Washington and Seaspan. Motley Fool newsletter services recommend FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.