It’s Still a Great Time to Buy 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.
Did you know that it’s estimated that 92% of the items in your home were transported by a shipping vessel? This massive global industry, while tossed around by the whims of the global economy, can be a very profitable place for investors if they know where to look. I’m personally not a big fan of stomach churning volatility, which is why I’ve chosen containership owner Seaspan (NYSE: SSW) as my preferred investment vehicle.
I like to think of Seaspan as a “floating REIT,” because instead of owning buildings rented out to tenets, they own containerships that they charter on long-term fixed-rate charters to major shipping companies. With little to no operational or economic risk, the company can take the massive cash flows and distribute them back to investors in the form of a very hefty 6.5% dividend. That dividend is one I really want to add to my virtual “No Drip, No Mess” Portfolio.
This actually marks my third attempt to add shares to the portfolio, as I previously tried to add shares by writing puts that both expired. While that strategy hasn’t been successful in adding the shares, it has delivered a decent amount of income, so I really have no complaints. Given the current volatility in the market, their puts continue to pay well, so it makes sense to continue this strategy.
Still, you might be wondering why I chose Seaspan and not some other global shipping company. In looking at their containership owning peers (aka floating REIT’s) investors could look at Danos (NYSE: DAC) or Costamare (NYSE: CMRE). Of those three, Seaspan is the largest with 69 ships while Danos has 64 and Costamare has 57. Moreover, Seaspan just completed a major new build program, meaning they are just about to enter into their highest distributable cash flow period while both of their peers are still building, and only Costamare is currently paying a dividend.
Another way to look at an investment in the industry is through drybulk carriers such as DryShips (NASDAQ: DRYS) or Diana Shipping (NYSE: DSX). However, both companies are much, much more volatile, and neither currently pays a dividend because they bear the economic and operational risks of shipping the goods around the world. While their upside is much higher in boom times, they can turn your stomach in the meantime.
Buying Seaspan is really buying into a very stable stream of cash flows, which currently exceeds the amount the company currently pays out via dividend. Buy some estimates, they are paying out just 20% of their distributable cash flow, meaning their dividend could eventually head much higher.
However, the company pays very close attention to how they allocate capital, and they are disciplined at buying back shares. They have a $50 million share repurchase authorization open, and they only seem to buy shares when they go below $15. In their last quarterly report, the company updated investors by saying they’d just bought back $1.4 million worth of shares at an average price of $14.87, leaving $48.3 million left on the authorization. If the economy teeters and shares slip past that price, I wouldn’t be surprised to see the company bump up the buyback and really start buying back shares.
That’s one reason why the plan continues to be to target the $15 puts, and this time I’m going with the February expiration. At last check these could be written for around $85 each, and again the plan will be to write two puts for a 3% allocation. The third time certainly is the charm premium wise as these puts yield around 5.7%, while I previously was only able to get 3.58% and 4.58%.
Writing puts on a slightly volatile but relatively flat stock can yield great long term results. This third put write brings the total income earned on the position up to more than 13% in less than a year. If I can eke out one more put write that expires around June, it is entirely possible that I’ll have generated an 18% return from a stock that I never actually owned and one that barely budged.
That’s a pretty good return on a company with limited downside thanks to the buyback and upside pressure thanks to economic headwinds. Over time, I think that Seaspan will be a very rewarding investment for patient investors, but right now I think writing puts is the way to enter the position. I’ll see you again in three months where we’ll either own Seaspan at a great price or can go for round four.
latimerburned owns shares of Seaspan. The Motley Fool owns shares of Seaspan. Motley Fool newsletter services recommend Seaspan. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!