Source: Seaspan.
Shipping stocks have taken an absolutely brutal beating over the past several years because of a massive oversupply of vessels. While profiting from high-yield shippers can be extremely difficult, it's not impossible. Take, for example, Seaspan Corp. (NYSE: SSW), which, though down 22% this year, has fared far better than competitors such as Navios Maritime Partners (NYSE: NMM), itself one of the best high-yield shippers of recent years. In fact, since the dark days of the financial crisis, Seaspan has managed to deliver impressive dividend growth and market-beating total returns, something few other shippers can claim.
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.
Source: Bloomberg data, author's chart
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.
Now, I'm not saying that slowing global growth hasn't affected container charter day rates. These have also collapsed recently.
Source: Harper Peterson & Co. Shipping Brokers Data, author's table
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.
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.
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.
