Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and how that's changed over the past five years.
The company we're looking at today is Seaspan (NYSE: SSW), which yields 6.6%.
Industry
Seaspan is a shipping company that focuses on container ships. The company uses long-term fixed-rate contracts, which has largely insulated it from the shipping oversupply crisis that has greatly hurt fellow shippers DryShips (Nasdaq: DRYS), Eagle Bulk Shipping (Nasdaq: EGLE), and Paragon Shipping (Nasdaq: PRGN).
Seaspan Corporation Total Return Price Chart by YCharts
Dividend
To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years, and if so, how much it has grown.
Seaspan Corporation Dividend Chart by YCharts
Seaspan cut its dividend in 2009 so it could put the funds toward building its fleet. Since that cut, the company has slowly begun raising its dividend. The company will soon finish building its fleet of ships, which are all already contracted out. Once the buildout is complete, Seaspan plans on paying out a large proportion of its earnings as dividends with a progressive dividend policy.
Immediate safety
To understand how safe a dividend is, we use three crucial tools, the first of which is:
- The interest coverage ratio or the number of times interest is earned, calculated by earnings before interest and taxes, divided by interest expense. The interest coverage ratio measures a company's ability to pay the interest on its debt. An interest coverage ratio less than 1.5 is questionable; a number less than 1 means that the company is not bringing in enough money to cover its interest expenses.
Seaspan Corporation Times Interest Earned (TTM) Chart by YCharts
At 5.79, Seapan's interest coverage ratio is more than enough and has been rising steadily since mid-2008.
Sustainability
The other tools we use to evaluate how safe a dividend is:
- The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.
- The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business's health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.
Source: S&P Capital IQ.
Seaspan has been largely unprofitable since it began its buildout. This should change as soon as the buildout finishes.
Alternatives
Source: S&P Capital IQ.
There are some alternatives to Seaspan out there in the industry. Similarly to Seaspan, none of the companies that pay dividends in the industry are currently free-cash-flow positive. DHT Holdings' (NYSE: DHT) trailing yield is 11.3%, while Nordic American Tankers' (NYSE: NAT) trailing yield is 8.4%, and Frontline (NYSE: FRO) lags with a trailing yield of 1.38%.
Another tool for better investing
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