Diana Containerships: High-Yield Dividend Play With Mid-Term Charters

| About: Diana Containerships (DCIX)

I first wrote about Diana Containerships (NASDAQ:DCIX) last October while they were trading at approximately $4.50/share. After completing an initial spinoff from their parent company, Diana Shipping (NYSE:DSX), for $13/sh, followed by a secondary offering for $7.50, Diana hit market headwinds and began trading far below book value with $2.64 of cash available and marginal debt levels. Diana Containerships has made a comeback in the market by deploying their cash to purchase new vessels and initiating a strong dividend program. As a result, DCIX has appreciated approximately 67% since my last article. I believe that although DCIX is no longer the "extreme value play" that it once was, this stock still provides a great entry point for someone interested in an MLP-type containership play. For price reference, an 18 month history is shown below (source: Google Finance).

New Fleet Order

In December 2011, DCIX deployed $66M to purchase two panamax containerships with 3,750 TEU. The average age of these vessels was 10.5 years, but both ships had strong 3-year time charters attached.

In January 2012, DCIX spent another $60M to purchase two additional panamax containerships with 4,750 TEU. The average age of these vessels was 16.5 years, but once again, they had above-market charters for 2 years with options to extend up to 4 years of coverage.

As a result of these recent vessel purchases, Diana now operates a fleet of nine containerships vessels with an average age of 13.9 years.

Time-Charter Duration

Diana's fleet of nine vessels has average time charter duration of 15 months which places them in a medium-term charter range. With current containership rates lagging, DCIX is well positioned for a potential recovery in 2013-2014. On the downside, one charter expires in fall 2012, with four more expiring during mid-2013. The 2012 contract grosses $22k/day, and would likely drop significantly, to approximately $10k/day in today's market. This will hurt dividend payout opportunities slightly.

Dividend Policy

In early June, DCIX announced a new dividend policy which essentially translates to a variable-rate based upon available funds from operating cash flows. Diana expects to pay a 30 cent dividend for Q2-12, which would translate to an annual yield of approximately 16%. It should be noted that the rate will not remain constant, which fits directly into the MLP-style set-up that DCIX offers. With the expiring charter in August likely to renew at around $10k/day, DCIX will likely pay close to 25 cents for Q3-12. This type of investment is not suitable for a mandatory (in retirement, etc.) income investor, but a long-term DRIP-approach in an IRA (or other tax free account) might prove very profitable in the long-term.

Recommended Trade

I think that DCIX represents a great long-term investment opportunity in the containership sector. With medium-term charters, DCIX is open for market recovery upside while also providing a solid balance sheet and a large dividend yield. Their long-term charters provide more stability than Box Ships (NYSE:TEU) and their dividend yield is much more appealing than Costamare's (NASDAQ:CRME) payout. Caution is warranted as the near-term prospects for the containership market are weak due to oversupply of vessels.

Disclosure: I am long DSX, DCIX.

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