Shipping stocks have suffered from weak and falling charter rates for years due to a massive oversupply of vessels. Yet not all shipping stocks have suffered during this time. For example, Seaspan (NYSE:SSW) has been able to achieve remarkable dividend growth over the past six years, as well as beat the market by a healthy margin.
Let's take a look at Seaspan's most recent earnings results to see three reasons why its business model has been so robust throughout this industry downturn, as well as two major risk factors that could end its impressive winning streak in the years to come.
Impressive Growth Continues
|Metric||Q3 2015||Q3 2014||YoY Change||Nine Months Ending Sep 30, 2015||Nine Months Ending Sep 30, 2014||YoY Change|
|Revenue||$213 million||$186 million||+14.5%||$601 million||$528 million||+13.8%|
|Adjusted EBITDA||$184 million||$160 million||+14.6%||$506 million||$415 million||+22.1%|
|Cash Available for Distribution (CAD)||$118 million||$98 million||+20.1%||$317 million||$234 million||+35.6%|
|Dividends Paid||$50 million||$29 million||+68.6%||$110 million||$83 million||+32.2%|
|Dividend Coverage Ratio||2.37||3.33||-28.2%||2.89||2.81||+2.8%|
Thanks to continued fleet expansion, Seaspan delivered growth where it mattered most: The company raised its dividend 8.7%, and more important, grew its cash available to pay dividends (CAD) 69%.
Dividend profile one of the best in the industry
|Yield||9-Month Dividend Coverage Ratio||Analyst Projected 5-Year Dividend Growth Rate|
As you can see, Seaspan offers income investors an ideal dividend profile. A sky-high dividend protected by a bank vault-like coverage ratio, and solid growth prospects to boot.
Better yet, Seaspan's cash flows are well protected by an average remaining charter length of five years. The weighted average contract length on its seven new builds that have already secured charters is 12 years.
Seaspan's existing backlog of charters stands at over $6 billion.
with $1 billion or about 17% of that being secured by seven new charters signed this year.
Thus far this year Seaspan's book-to-bill ratio is 1.77 meaning for each $100 in revenue generated its secured $177 in new contracted revenue.
Management's growth plans going forward
Seaspan has a solid growth plan through 2017 involving nine new builds, seven of which have already obtained long-term charters which should increase the charter backlog by approximately $1.4 billion if they obtain the same terms as their sister ships already delivered to the fleet.
The company also has nine new builds scheduled that it will manage for Greater China Intermodal Investments (GCI). Of those vessels, seven also have long-term charters already secured.
Overall, Seaspan's ambitious growth plans call for an 18% increase in its fleet size over the next 27 months.
More important for dividend investors is the fact that 14 of these 18 new builds have already obtained charters ranging from five to 17 years in duration. Investors can also be confident that the addition to Seaspan's backlog is not likely to face default due to the strength of the customers that will be paying for the use of Seaspan's ships.
In terms of financing this fleet expansion, Seaspan made substantial headway this quarter: It obtained $219 million in term loan and lease financing for two large container ships.
Most impressive, though, was the $1 billion credit facility the company obtained from the Export/Import Bank of China to fund construction of new builds in several Chinese ship yards.
As always, don't forget the risks
As rosy as Seaspan's growth prospects look over the next few years, there are two main risks investors need to be aware of.
The first of these is the additional large financing the company will need to obtain through the end of 2017 to fund the completion of its fleet expansion. Seaspan's existing debt currently stands at $3.7 billion. While that is down $141 million, or 3.7%, since the third quarter of 2014, it still represents a substantial amount of leverage. For example, Seaspan's trailing-12-month debt-to-EBITDA ratio stands at a hefty 8.2.
Seaspan's existing debt is spread over several term loans and credit facilities. Many have firm debt covenants that the company cannot breech lest its creditors immediately call in the loans, and potentially force it to cut or even suspend its dividend.
A second risk is that container shipping day rates fall and stay low. In 2016, 15% of Seaspan's fleet (representing 5% of projected 2016 EBITDA) will need to be rechartered. Almost all of the charters rolling off in 2016 are for 4,250 TEU (20 foot equivalent units) ships whose chartered day rates have declined 48% in the last month compared to their average 2015 rate.
Lower renegotiated charters would mean each vessel's ability to increase CAD per share would proportionally decrease. That in turn could lower Seaspan's ability to increase dividends in the future.
Seaspan remains one of the best high-yield dividend shipping stocks, but know the risks
When it comes to shipping stocks, I can't think of any choice for long-term dividend investors better than Seaspan. Its business model of continually growing its fleet and securing long-term, fixed charters has made for some of the most impressive performance in its industry. And most important, its dividend remains one of the most secure thanks to its rock-solid dividend coverage ratio.
That said, investors need to know that -- barring a recovery in container shipping rates -- Seaspan's dividend growth going forward might slow due to its large debt load, and thus an inability to continue growing its fleet as quickly as before.
Adam Galas leads The Grand Adventure dividend project, which recommends Seaspan. 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.