Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.
Let's examine how Seaspan (NYSE: SSW ) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.
1. Yield
First and foremost, dividend investors like a large yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.
Seaspan yields 5% -- moderate, but not necessarily cause for alarm.
2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company pays out in dividends to the amount it generates. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford.
Seaspan didn't generate earnings or free cash flow over the past 12 months.
3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Let's examine how Seaspan stacks up next to its peers:
|
Company
|
Debt-to-Equity Ratio
|
Interest Coverage Ratio
|
|
Seaspan
|
217%
|
6 times
|
|
DryShips (Nasdaq: DRYS )
|
72%
|
5 times
|
|
Costamare (NYSE: CMRE )
|
379%
|
7 times
|
|
Danaos (NYSE: DAC )
|
644%
|
4 times
|
Source: Capital IQ, a division of Standard & Poor's.
Like many of its peers, Season appears to bear a fairly significant debt load.
4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
As mentioned above, Seaspan isn't generating earnings. Over the past five years, its dividend has shrunk at an annualized rate of 12%.
The Foolish bottom line
While its yield and debt appear moderate, the most important issue for Seaspan's dividend investors is its difficulty generating earnings and free cash flow.
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