We’ve been fans of preferred high dividend stocks for some time now, having owned and written about them for several years. However, in the yield-crazed market of 2016, it has become increasingly difficult to find attractive preferred stocks trading below its call value.
However, that just changed, for now. One of our perennial favorite dividend stocks, Seaspan, (SSW), just announced a new preferred offering in early August, and, miraculously, this new stock is still trading below $25.00.
Profile: Seaspan operates as an independent charter owner and manager of containerships in Hong Kong. The company charters its containerships pursuant to long-term, fixed-rate time charters to various container liner companies. As of May 27, 2016, its fleet consisted of 89 vessels. The company was founded in 2005 and is based in Majuro, Marshall Islands.
Seaspan has grown to become the world’s largest containership lessor, with 3.8% of the global fleet, and $6B in contracted revenue. Its business model is based on long term contracts for its vessels, most of which are contracted out for years in advance, even before they’re built.
Their fleet currently has an avg. remaining contract life of 5.4 years.
SSW’s fleet is leased out major shipping firms that operate on the trade routes between the Eastern and Western hemispheres.
Preferred Dividends: SSW recently issued a new cumulative preferred Series H, which is trading at $24.77, below its $25.00 call value. It’s a perpetual stock, meaning it doesn’t have a maturity date, but SSW can call it/redeem it at any time starting 8/11/21.
On the face of it, these SSW-H shares have a similar yield to SSW’s other 3 preferred series. However, when you look at their yield to maturity, you’ll see a different story.
Since the SSW-H shares are trading below $25.00, you’d also have a $.23/share gain, if you held them to their 2021 call date, and SSW redeems at that time.
This accounts for the higher 8.18% “Yield to Maturity”, (or, in this case, Yield to Call Date), on the SSW-H shares.
Another big plus is that all of SSW’s preferred shares are cumulative, meaning that SSW must pay the preferred shareholders 1st for any skipped dividends, BEFORE they pay any more common dividends.
Of course, it always pays to look at any stock’s dividend coverage. In general, you’ll find that preferred stocks have better coverage than common shares, since preferred dividends payments are subtracted above the net income line on income statements. In SSW’s case, its preferred dividend coverage has been lumpy on a quarterly basis, but overall they’ve had a 3.45x coverage factor for the past 4 quarters:
Our High Dividend Stocks By Sectors Tables page tracks the current price and yield for SSW’s preferred and common stocks, in our new Services table.
Common Dividends: SSW’s common stock is currently yielding over 10%. The company has had good dividend growth over the years, with a 5-year dividend growth rate of over 21%.
We looked at SSW’s Net Earnings and added back Depreciation & Amortization to it, to arrive at their current common dividend coverage, which also looks pretty healthy, at a 2.43x factor over the past 4 quarters:
Options: SSW also has options, but there aren’t any compelling trades at present. However, you can see details for over 25 other income-producing trades in our Covered Calls Table, and also in our Cash Secured Puts Table.
Earnings: SSW has had strong growth in Revenue, and Normalized EPS, over the past 4 quarters. Its EBITDA and Cash Available For Distribution growth have have been more modest, but still over 6% and 7% respectively.
Looking back further, SSW has also had good growth:
Performance & Price Targets: With all of this growth, you’d think that the market would have rewarded SSW with some price gains. However, this hasn’t been the case – SSW’s common shares have underperformed until the past month, due to concerns about China’s slowdown. As you saw above, though, its preferred shares however have done well, with all but the new offering above their call values.
SSW’s common shares now sit at 1.5% below the consensus price target of $15.00
Valuations: With shipping stock prices all over the place, these broad industry averages are a bit odd – many shipping companies show negative P/E’s, due to the fact that, as LP’s, they use a distributable cash flow earnings model instead. SSW looks fairly valued on a Price/Book basis, but then, look at the disparity in the dividend yield, vs. the industry average.
Financials: SSW has a very impressive operating margin, but it does carry more debt. It has strong relationships with financing sources in Asia – it raised over $700M there in Q2 2016 alone, due to its strong track record, while at the same time redeeming the balance of its outstanding C-Series preferred shares.
Disclosure: Author owned shares of SSW, SSW-E, and SSW-H at the time of this writing.
Disclaimer: This article is intended for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing any of the stocks listed in this article.
Copyright 2016 DeMar Marketing. Al rights Reserved.