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.
Seaspan (NYS: 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 best part.
See, in 2011, looking ahead to the completion of the fleet and the burgeoning of the cash flows available for distribution, Seaspan adopted a "progressive" dividend policy expected to increase the payout in a sustainable manner as cash flow grew. The recent dividend increase reflects this policy. Moreover, there's plenty of room to run. By 2015, the current $1-per-share dividend would reflect approximately one-quarter of distributable cash. Meaning that, reflecting stated policy, that dividend is going to go higher.
As it does, it will drag the share price upward. For example if, in two years, the dividend reaches $2 (barely where it was ahead of the credit crunch) and the market awards a 7% yield (higher than today -- remember that yields and prices are inversely related), that suggests a stock price north of $28, as well as a second reason to hold Seaspan in your IRA: longer-term protection of your capital gains.
Risks to watch
Risks to Seaspan include financial issues when the credit facilities start to roll over in 2015. There's no guarantee that similar or better financing terms will be available at that time.
There was some counterparty concern during the worst of the credit crunch as some lessees, financially strapped themselves, made overtures to renegotiate their charters. Seaspan rebuffed all such inquires, and all counterparties ultimately honored their agreements. But a second crisis might not have a similarly happy outcome.
Finally, the two largest lessees of Seaspan's contracted fleet (Cosco and CSCL) are controlled by the Chinese government. Not to be unnecessarily paranoid, but it's fair to say that the Chinese government can be expected to act always in its own self-interest. Right now, that interest is aligned with Seaspan, and I expect that alignment to remain, but there's always the potential for a falling out.
The bottom line
Seaspan in your IRA offers three things you should love while sheltering from taxes for the longer term: a fat dividend, a growing fat dividend, and attendant capital appreciation. Second star to the right and straight on to profits!
Of course, it's important to diversify your retirement portfolio beyond just a stock or two. If you'd like some more ideas, we've identified three stocks that we think will help you build a smarter retirement portfolio. They're listed in our brand new special free report "3 Stocks That Will Help You Retire Rich." The report is absolutely free, but it won't be around forever. Make sure to grab your copy today by clicking here.
See what else our Foolish writers would add to an IRA; click back to the series intro for links to the entire series.
At the time thisarticle was published Fool contributor Jim Gillies owns shares of Seaspan, and has written put and call options on Seaspan. The Motley Fool owns shares of Seaspan.Motley Fool newsletter serviceshave recommended creating a covered straddle position in Seaspan. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.