Markets
NMM

3 Reasons Seaspan Is the Best Shipping Stock to Buy Right Now

SSW Dividend Chart
SSW Dividend Chart

SSW Dividend data by YCharts

Let's look at three reasons Seaspan has proved not only why it's been a superior shipping stock in the past, but also, more importantly, why it's likely to remain the best high-yield shipping investment of the next few years.

Superior fleet

One of the biggest reasons for Seaspan's success has been its exclusive focus on container ships, whose charter rates can be much higher than those of dry bulk shippers. In fact, the Baltic Dry Index recently hit an all-time low, as China's slowing economy has decreased demand for iron and coal shipments, the largest source of business for the dry goods shipping industry.

Navios Maritime began its life as a dry bulk shipper that has transitioned to focusing on container ships.However, its legacy fleet of dry bulk vessels still makes up 74% of its 31-ship fleet and is expected to generate 35% of its 2015 contracted revenue.

Source: Bloomberg data, author's chart

Now, I'm not saying that slowing global growth hasn't affected container charter day rates. These have also collapsed recently.

However, luckily for Seaspan larger container ships still fetch far better charter rates than their smaller cousins and since 2012, all 17 of the Seaspan's new ships have been 10,000 TEU to 14,000 TEU in size.

Source: Harper Peterson & Co. Shipping Brokers Data, author's table

Another competitive advantage Seaspan has is that all new vessels it builds use its state-of-the-art, proprietary SAVER design, minimizing fuel consumption, which can account for as much as 45% of a ship's operating costs.

This focus on larger, differentiated, super-fuel-efficient vessels has allowed Seaspan to lock in extremely profitable and very long-term charters for as much as $55,000 per day.

Seaspan has nine new builds under construction scheduled for delivery over the next two years, with an average capacity of 11,222 TEU (20-foot equivalent units) and a charter length of 12 years. These new ships should increase Seaspan's existing contract backlog considerably.

Source: Seaspan 6-K.

Seaspan has nine new builds under construction scheduled for delivery over the next two years, with an average capacity of 11,222 TEU (20-foot equivalent units) and a charter length of 12 years. These new ships should increase Seaspan's existing contract backlog considerably.

More importantly, they should provide it with sufficient increased cash flow to protect its cash available for distribution -- which pays the generous 10% dividend -- from potential lower charter renegotiation for the 24% of its current fleet it has coming off contract through 2017 that don't have charter extension options.

Of course, aggressive fleet expansion takes a lot of capital, and here, too, Seaspan shows its strength.

Superior access to growth capital

Enormous, state-of-the-art vessels don't come cheap. In fact, each of Seaspan's new builds costs over $100 million. This cost serves as another competitive advantage for the world's largest independent container vessel leaser and charterer: Smaller competitors often can't come up with the cash to fund large-scale fleet expansion of such expensive ships.

Seaspan doesn't have such issues. In just the last two quarters, it managed to secure $1.219 billion in new financing to fund its growth. In fact, Seaspan's total liquidity stands at just over $2 billion, and that's not counting the $276 million in annualized excess cash available for distributions the company is generating that could fund two large container ships per year.

Compare that with a much smaller competitor such as Navios Maritime, which has just $25 million in cash, the minimum amount required under its debt covenants. In other words, Navios can't spend any of its cash, and its total liquidity is limited to the $60 million in available borrowing power under its credit facilities. That liquidity isn't enough to afford even a single large container ship to rival those of Seaspan.

Superb dividend coverage

Navios Maritime's recent 52% slashing of its distribution was necessary because 15 of its 23 dry bulk vessels are going off contract by the end of 2016 and are likely to get rechartered at much lower day rates.

Seaspan, on the other hand, generated a three-month and year-to-date dividend coverage ratio of 2.4 and 2.9, respectively. This performance indicates that its dividend, which increased 8.7% year over year, is likely to be not only secure but also capable of continued growth.

Bottom line

With its large and growing fleet of modern, state-of-the-art container ships, strong liquidity position, and bank vault-like dividend coverage ratio, it seems clear that Seaspan remains the best high-yield way to profit from a potential future global recovery in shipping.

The next billion-dollar iSecret

The world's biggest tech company forgot to show you something at its recent event, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here .

The article 3 Reasons Seaspan Is the Best Shipping Stock to Buy Right Now originally appeared on Fool.com.

Adam Galas has no position in any stocks mentioned. The Motley Fool recommends 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 .

Copyright © 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

NMM

Other Topics

Stocks

Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More