The Motley Fool Previous Page

Why Seaspan Is Right for Your IRA

Jim Gillies
April 11, 2012

This article is part of our Right for Your IRA series, in which Foolish writers each pick a stock or ETF that could be a great fit in a tax-advantaged retirement account.

With the IRA deadline just around the corner, my Foolish colleagues are shouting from the rooftops their favorites for purchase within your shiny new retirement account. My pick? A cash-gushing profiteer moving goods from the world's Asian manufacturing centers to its North American and European consumption centers.

The business
(NYSE: SSW  ) owns and operates a growing fleet of container ships -- 67 at last count, with two more setting sail within weeks. Shipping companies can often be overleveraged shipwrecks-in-waiting, often run by folks who would look equally comfortable sailing under a Jolly Roger. However, Seaspan is different, setting itself apart with an intelligent long-term business strategy and a notable record in navigating the rough waters of global credit crunch and recession.

Seaspan's original fleet of 69 contracted ships will be complete this month. The modus operandi has been that, as the new-builds leave the construction yard, Seaspan immediately leases them under long-term, fixed-rate charters to the world's largest liner companies. Seaspan operates the ships for the lessees, who pay day rates depending on ship size. Fuel price risk is borne by the lessees, and the long-term nature of the charters, as well as staggered expirations, removes short-term charter price risk.

Seaspan's charters provide a growing stream of cash flow. The credit crisis of 2008/2009 provided a dose of fiscal conservativeness to management. Those steady cash flows allow Seaspan to run reasonably leveraged; the company finances ships with a mix of approximately two-thirds debt capital and one-third from equity markets. When the credit crunch hit, it was, ironically, not the debt that proved problematic. Like its ship charters, Seaspan employs a series of long-term staggered expiration credit facilities for the debt portion of its capital base, none facing renewal before 2015.

However, the recession and credit crisis slowed consumption in Western nations, sinking the share price when the equity side of the business wasn't fully funded. It then became Hobb's Choice: The low share price meant equity offerings would be horribly dilutive, but failure to raise additional equity capital meant completion of the contracted fleet was in jeopardy, putting future cash flow increases at risk. Or management could cut the generous dividend, retaining cash to finance shipbuilding, though surely angering shareholders who invested precisely for that dividend.

They did. The stock got crushed. But it worked, the fleet is fully financed, and the high capital spending that has defined the past several years is about to end, leaving Seaspan with distributable cash, estimated to exceed $320 million annually once fleet construction is complete.

Why it's IRA-worthy
At its heart, Seaspan is a rising yield play, which is what makes it attractive for squirreling away in an IRA, where dividends and capital gains are not subject to tax until withdrawal. An added bonus is that Seaspan has a dividend reinvestment plan, or DRIP, which allows shareholders to reinvest dividends into additional shares without paying brokerage fees.

Until the credit crunch hit, Seaspan paid out $1.90 annually per share, but scaled back to $0.40 per share for the aforementioned cash crunch rationale. It has since bumped up its dividend three times, and anticipate paying out $1.00 in 2012, for a 5.8% dividend yield. But that's not the bes