High Yields Found on the High Seas
Gary is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wrap up a 16% dividend with Box Ships
Good things come in small boxes. Better yet, great yields come from moving big boxes. Box Ships owns the containerships that carry those big boxy containers across the seven seas.
Containership operator Box Ships Inc. (NYSE: TEU) currently has a dividend yield over 16% and has been named as a Top 25 dividend stock according the most recent ”DividendRank” report.
Why most investors fear all ships have sailed
Whether you're buying furniture, bananas or statues, they probably arrived on our shores in a standardized inter-modal shipping container stacked high in a container ship. (Furniture, bananas and stonework are the top three containerized imports by weight.)
While bananas still have their appeal, overall the global recession has not been kind to the container ship industry. There are fewer boxes being shipped these days.
Demand for transporting containers dropped while pre-ordered container ships kept sailing out of the shipyards. Supply and demand have hurt the industry. The market price of container ships sank, shipping day rates sank and several shipping companies sank into bankruptcy.
Be greedy when others are fearful
Where some see problems, others see opportunities. In April 2011, experienced international shipper Michael Bodouroglou created Box Ships to buy a fleet of container ships. Good timing, because during the recession many ships are selling for foreclosure prices. His strategy is to lock in profits with period time charter contracts, where the entire ship is chartered for months or years at a set rate. Charters have kept Box Ships' fleet in shipshape financial condition. During the first quarter, TEU's seven vessels had an amazing 99.8% utilization rate.
So far, so good. The dividend policy is to distribute quarterly substantially all of the operating cash flow less expenses. In the first 3.5 quarters Box Ships paid $1.05 in dividends. Before the recent addition of two more vessels (more on that in a moment) TEU was projecting dividends of $1/share for 2012.
Prices sink, yields float up
When investing in dividend stocks, your percentage yield (dividend/price) increases when you buy at a lower stock price. Thus the best values can be found at low tide.
Perhaps it was bad luck for Box Ships to announce a public offering of 4.5M shares before the market opened on Friday the 13th of July. The offering increased the number of common shares outstanding by 28%. That was scary to investors because, in bad times, floundering shipping companies often make dilutive stock offerings to gather enough cash to bail out the balance sheet and stay afloat.
Skittish investors jumped ship. Share prices were torpedoed, dropping overnight from over $8/share to under $6.50.
That same scenario played out the following week when Diana Containerships Inc. (NASDAQ: DCIX) took a similar pricing hit, share prices dropped over 14% following Diana Contanerships' public offering announcement on July 19.
Avast ye Matey, hold fast and come about
Fortunately, this offering was not made to bail out a sinking balance sheet. Box Ships is making a profit and has a strong balance sheet. Instead, the bulk of the stock offering proceeds went towards the purchase of two more ships, the OOCL Hong Kong and OOCL China. Both ships come with 36-month period time charter contracts that will generate a net of about $57M. The average earnings/share for Box Ships should increase with these additions to the fleet.
Chairman Bodouroglou, who already has significant skin in the game, purchased 2.6% of the public offering at the $7/share offering price through his company Neige International Inc. The underwriters paid $7/share minus a small commission for the remaining shares.
Time to drop anchor and come aboard
There are three ways to profit from this under pricing of Box Ships. First, at a recent opening price of $6.22/share, the expected dividend yield is over 16%. That assumes expanding the fleet provides no additional cash flow or subsequent additional dividends. Second, the market is undervaluing Box Ships. This past Tuesday's market price was 21% under the share offering price and 52% under Q1 book value. That's a significant discount. Third, the future looks bright for those who can survive to reach port. Market fears regarding the economy are already boxed and loaded in the market price.
When (and some say if) the global economy improves during the coming years, Box Ships will benefit from increases in the currently depressed shipping rates. In the meantime, Box Ships has contracted the steady income stream needed to ride out the current economic storm.
Sailors cannot predict how long it will take for the global economy to regain it's sea legs and return Box Ships to a fair market price. In the meantime, I'm happy to cash in on that 16% dividend.
PhotoPhool has shares of TEU. The Motley Fool has no positions in the stocks mentioned above. 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.