For those of you unfamiliar with my preferred Investment philosophy, The Basics Underlying Investments Viewed Through the Eyes Of A Preferred Investor will explain how and why I became a preferred investor. More importantly, it will provide you the information necessary to fully appreciate and understand the process I utilize to research and determine whether or not I will invest in a particular company's preferred equities. What follows is that process:
When considering the acquisition of Seaspan Corp.'s (NYSE:SSW) preferred shares, SSW-C, D, & E, it's necessary that we view that company through a different set of eyes than we would were we interested in acquiring its common shares.
Consequently, unlike its common cousins, it's necessary that we first study the offering prospectus of the preferred shares we are interested in acquiring. To accomplish this, let's visit my favorite preferred search site, Quantum Online, which I set to open to Seaspan Corp. Below is a snapshot of a slice of that page:
A quick review informs us that Seaspan is one of the largest owners of containerships and a leading ship management service. It represents 118 containerships, has 23 newbuilds on order, and has a current fleet of 82 vessels an average age of seven years, which is among the youngest in the industry. I like that it has a market value of $1.5 billion. In my experience, companies with under a billion dollar market value are more prone to bankruptcy than are those larger companies in the event company-specific, sector-specific, or general market forces might turn against them. I am concerned about the 23 newbuilds on order scheduled to be delivered by the end of 2017. That's because of the current over-supply of ships in this sector, which is the primer cause of the historically low shipping rates.
Let's click on the Find Related Securities to examine any preferreds this company has to offer:
Here we learn that SSW offers three preferreds, (SSW-C, D, & E), which are offered at respective interest rates of 9.50% 7.95%, and 8.25%. I find it interesting that the earliest issue, the C, offered the highest interest rate, the D the lowest, and the E, the latest issued, its interest rate between the two. This illustrates a strong company, yet, as its peers, forced to borrow money at an increased interest rate, which is understandable considering the continuing headwinds buffeting the containership sector of shipping. Interestingly, it also offers a senior note, SSWN, at 6.375%, due in 4/30/19.
Now let's click on SSW-C itself. I'm particularly partial to investigating the preferred offered sporting the highest coupon rate. Because this page contains more information than can be covered in a snapshot view, I suggest you open the page and view it as I discuss the information that interest me:
- I like that this preferred is cumulative, meaning that in event that payments are suspended, they accumulate and are owed the shareholder, and will be repaid in full if and when the payments are restored. And they must be completely repaid before the common shareholder will be allowed to receive any further dividend payments. Additionally, there are probably more sanctions and restrictions placed on the company, and will remain so until the missed payments are repaid in full. As a rule, I only invest in cumulative preferreds. Although bank preferred dividends are usually secure, they are almost always non-cumulative, consequently, I don't buy them.
- These shares are callable at the company's option on 1/20/16 at $25.00 plus any accrued interest owed. Which means they are currently callable and can be called away at any moment.
- They pay a dividend of $2.375 per share per year, or 0.59375 per quarter, paid 1/30, 4/30, 7/30 & 10/30 of each year.
- At the time of their IPO these shares were unrated by Moody or S&P, which really doesn't concern me, but might concern a more conservative investor.
- These shares have no stated maturity, meaning they can remain uncalled in perpetuity, which is fine with me. Pay me, pay my heirs, pay the heirs of my heirs for all I care. However, if called, it will be at their $25.00 call value plus any accrued interest owed.
- Dividends are eligible for the preferential income tax rate of 15% or 20% depending upon the holder's tax bracket, which is a big plus. In addition, the company might consider such payments as return of capital, ROC, requiring no tax payment each year it is collected; with the understanding that it will reduce the original cost of those shares by the total amount of dividends paid and not taxed, which will ultimately affect the capital gain or loss when the stock is sold or called.
- As usual, preferreds upon liquidation, rank senior to commons and junior to debt, both secured and unsecured.
- And here is a nice little bonus if SSW fails to meet certain obligations, which I have added as a screenshot below for your reading pleasure:
However, simply knowing and understanding the preferred issues of a company in no way allows one to gauge a company's long-term health or fully comprehend its business model. To better accomplish this, a knowledgeable investor should be able to dig down into the numbers, and at least marginally, understand a company's financial statements and conference calls. Sounds reasonable, but extremely difficult for most investors, including myself. I often rely on interpretations by SA contributors who have proven more knowledgeable than myself. Unfortunately, the vast majority of their articles are written with the common shareholder's interest in mind rather than those of the preferred shareholder, which on occasion, might not be in alignment. Also, as I mentioned above, other SA members might view their conclusions in a different light. When this occurs, I simply try to figure out which argument sounds the most logical. Sorry, that's the best I have to offer.
Consequently, rather than attempting to digest and understand complicated financial statements, which I realize I won't be able to realistically accomplish with any degree of accuracy, I usually visit two web sights to get an abbreviated, yet broad-based view of the particular company I'm considering making an investment in. They are Yahoo Finance and Finviz. I have cued each to open to the financials of SSW.
Above is a screenshot of SSW's 5 year chart, which, as far as I'm concerned is the picture of a solid company, although understandably facing recent headwinds buffeting the entire shipping sector. The price of its shares during this time has trended down since the latter half of 2014, yet experienced a recent bump up to its present price of $17.33. Good for this sector. Mystifyingly so, during the past two years, SSW has increased its common quarterly dividend from 0.345 to the present 0.375 per share.
Above is a screenshot taken from a Finviz view of SSW's present financial highlights. Interestingly, the company's market value has increased to $1.71 billion dollars from $1.5 billion in 2011 when the Series C shares were first issued. It also showed an income of $144.50 million, and although it has recently trended higher, its stock price over the past year has fallen by approximately a paltry 3.47%, yet has recently risen by 11.44% during this last quarter. I also find its debt/equity a reasonably manageable 1.91, and long-term its 1.75.
According to the Yahoo chart above, SSW placed solidly at the top of its peer group in a very tough sector where all performed negatively compared with the S&P. Understandable and unsurprising considering the plight of the container shipping sector. Its above charted peers are: Diana Shipping (NASDAQ:DCIX), Navios Maritime Partners, (NYSE:NMM), Global Ship Lease, (NYSE:GSL), and Costamare (NYSE:CMRE).
The final chart illustrates the 3 year price movement of the preferred issue SSW-C we are interested in acquiring. This is the chart of a strong company preferred, which has trended down slightly, considering the negative sector dynamics. Although it has rebounded a bit of late, it is too soon indicate a trend.
My bottom line decision is to look at charts of the past few years performance of the company's common shares, coupled with whether or not said company is, over time, prospering or losing market value. Ultimately, I have to decide how safe this company is from an existential standpoint rather than how well its share price will perform over the next quarter or the following year. Ultimately I must decide whether or not I believe in the long-term survivability of SSW, which I do. Should you decide to take the plunge, at this moment the C Series is the best buy. Before you buy, you might want to do your own due diligence. For those of you who do, I direct you to the SA transcript of their most recent conference call. My advice is simply my opinion, and you know what they say about opinions and how everyone has one. It's your money, invest it with care. As a bonus for being a patient audience, I worked out the math below, which takes into account today's prices, although they might change tomorrow and accordingly the best choice might change. You know the formula, it might be wise to do the math prior to placing your bid.
*Although the C Series is the best yield-wise, it is callable now, and you would lose .10 were that to happen, which most probably will be when callable because of penalties, which are outlined in a screenshot above, However, in my opinion it's still the best buy.
P. S. I updated C's last trade, which was at 25.10. Did not do the same for the other series, which I invite all to do if they are contemplating a bid.
Disclosure: I am/we are long CMRE-C, CMRE-D, GSL-B, SSW-C.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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