ATCO - Atlas Corp

[Myth465]

I see both your points. On the board we were excited last year at around $10 due to ever rising dividends due to fleet coming online. We won either way, either with double digit yield on $10 a share or a share price increase as the yield traded down to 7% or so. That is obviously not going to happen, the share price may go up, but not as much as with dividend raises.

 

VAL this was communicated so I can see where you are coming from. But it does smell like emperor building for the sake of. They could simply not buy any ships. Take delivery of a the rest, hold some capital, and pay out all excess capital. They will get a higher return with the new ships, but the risk is the economy inmo. Those who bought during the down turn want to be paid off now.

 

Its tough. The only thing we can do is buy or sell. I sold all shares, bought a few options. Not sure what will happen. People may buy in due to growth, or they may sell due to reduced income.

[ERICOPOLY]

Hopefully if they are hell bent on raising cash flow per share they will instead make what is the best decision for shareholders.  Which is to buy shares back instead -- it carries no financing risk, and yields the same returns as buying new ships.

 

But no, that doesn't serve his ego, or his pocketbook.

 

 

[Uccmal]

Eric, Val, Myth, I am glad to have all these different points of view.

 

One other possibility is that Gerry has already got commitments for all of the new ships, or at least strong interest expressed from some of his sounder customers.  If that is the case and each ship comes on line and immediately accretes to cash flow than that would be okay with me. 

 

If they continually add to debt and perpetually delay the dividend increases I will lose interest.  If they run New Company with its own capital structure completely and SSW receives only dividends from New Company, I am okay with that as well, unless NEWCO takes business from SSW. 

 

My concern is that there must be an upper limit to the total number of ships any one company can run.  At a certain point, probably long ago, there are no more economies of scale to be had, and all you are doing is taking on financing risk.  A smaller/slow growing SSW that raises its dividend 20% per year would work for me as well as the Empire building. 

 

This is part of investing.  No situation is perfect.  The only time in my investing career I have been virtually all in one company is FFH in 2006 - probably peaked at 60-70%.  I would never do that now with anything, except cash. 

 

Myth, My buy and trade routine is not working out as fast as I would like this time; :P  Always a downside - good thing for the >4% yield.

[Myth465]

Eric, Val, Myth, I am glad to have all these different points of view.

 

One other possibility is that Gerry has already got commitments for all of the new ships, or at least strong interest expressed from some of his sounder customers.  If that is the case and each ship comes on line and immediately accretes to cash flow than that would be okay with me. 

 

If they continually add to debt and perpetually delay the dividend increases I will lose interest.  If they run New Company with its own capital structure completely and SSW receives only dividends from New Company, I am okay with that as well, unless NEWCO takes business from SSW. 

 

My concern is that there must be an upper limit to the total number of ships any one company can run.  At a certain point, probably long ago, there are no more economies of scale to be had, and all you are doing is taking on financing risk.  A smaller/slow growing SSW that raises its dividend 20% per year would work for me as well as the Empire building.   

 

This is part of investing.  No situation is perfect.  The only time in my investing career I have been virtually all in one company is FFH in 2006 - probably peaked at 60-70%.  I would never do that now with anything, except cash. 

 

Myth, My buy and trade routine is not working out as fast as I would like this time; :P  Always a downside - good thing for the >4% yield.

 

My issue is I am constantly fidgety and nervous about the economy and businesses in general. Wang seems a bit too excited, and I saw the same thing in the tanker market. This business is very different and much more conservative, but I prefer growth when things are bad, and smooth sailing when things are good. I just dont see the point of investing in this economy, bad times in my opinion will come soon enough.

 

I think he has the customers locked up and everything looks great, but at some point inmo they wont. Better to payout 85% cash, hold a bit back, perhaps get a revolver and pay down some debt. Get terms on the revolver out 4 years and use that during downturns. I would prefer something like that. Relax, age the fleet, and buy when others get overextended. He has a strong backer so perhaps the downside isnt too big.

 

---

 

I agree with you though. Take care of shareholder A who wants a div, take care of shareholder B who wants growth, or take care of yourself (growth again). So we all know where its going.

 

Uccmal - I have learned alot and really adjusted my format / game plan, just need to trade a few things to raise a bit more cash. I will be doing buy and trade a bit more, vs. buy and hold for IV. I predict decent gains once it gets going - just need an uptick in the market lol. Thanks for the tip.

[schin]

I was looking into openning a put position by selling some leaps. Nov 11 - 17.50 Puts @ 2.1.  My questions to the board is:

 

If SSW declares normal dividends, it would just reduce the market price... Even if it trades at 18 dollars, and declares a dividend. The market will adjust the price ex-dividend and I could get putted in Nov.

 

All things being equal, I wouldn't mind 2.10 to reduce my cost basis on SSW to 15 and change -- if I need to buy it. Does anyone sell puts on stock which you expect a large® dividend payout. Is that a bad recipe?

 

Thoughts?

[Uccmal]

schin, Isn't the objective of selling the puts to get the income?  I know that investment textbooks all talk about the price of a stock trading down after a dividend but I have never seen it consistently occur in practice.  SSW pays a 4.2% dividend at todays close.  That should put a floor on the stock at some level 0.75/0.05 = 15 perhaps. 

 

Wouldn't keeping your duration as short as possible give you the greatest chance of getting your income.  Say 2-3 months out, write another set in a month, rpt, rpt again.  I am by no means giving advice here just trying to work out what makes the most sense to me.

[finetrader]

schin,

 

puts are usually more expensive and calls cheaper on companies that pay a big dividend.

 

I also sold a few puts on SSW at 17.50$ strike so that I either get to buy at around 15.50$ or keep the premium for me.

[schin]

Uccmal,

 

Yup, the point of selling options is to keep the option. The challenge I often run into is the liquidity and pricing in the options market.

 

Sell out of money puts don't provide the risk/reward ratios after factoring in the spread and commission I pay. I don't trade a lot of contracts.

 

Also, the larger investment question I'm trying to get help on is...

 

Given 2 stocks with relatively low P/Es (Cisco -- which pays a minimal dividend or SSW -- which pays a 4-5% dividend.)... which is a safer options bet?

 

I've generally seen at-the-money options giving you 15-20% premium on LEAPS. So, worst case, you're in the position at 15% (premium received) relative the strike price.

 

For dividend payers, I'm wondering if it's premium - dividend rate as your margin of saftey before you enter the position.  For example, Stamps.com or Interactive Brokers, who have paided out special dividends.

 

As a put holder, you don't get that distribution and it affects the market value price.  Just wondering about the thoughts of the board.

[Guest VAL9000]

I listened in on the investors presentation today, pretty interesting discussion.  Gerry Wang was in a feisty mood and kept reiterating that he was going after ship builders for blood.  His main argument was that during periods of growth, the ship builders would bleed him.  Now he's looking to win back his pound of flesh in the form of cheaper, more advanced vessels.

 

There were a few hints dropped about expansion plans.  By far the most interesting that I recall are:

- 10-15% growth per year for the next "5 year plan".

- The Chinese customers (CSCL and COSCO) are looking at growing their fleet by 15% or so over the next five years.

- Seaspan will be paying < $10,000 per TEU for new vessels, whereas they used to pay $15,000 per TEU.

- The new ship design means that fuel consumption for a 10k TEU vessel will be equal to that of a 5k TEU vessel.

 

I'll give the math a hard look in a few weeks, but this is looking promising in terms of controlled, managed growth for Seaspan.  Eric, I thought you'd be most pleased by the 10-15% growth number.  That's 40k-60k TEU per year, or 4-6 ships...  really quite a bit slower than what we've seen in the past.  And once again that gets us right near the 100 ship number.

 

Ok, quick look at the math because I can't help myself.  The usual debt/equity ratio has been 40/60.  That's $200mm of equity, $300mm debt for 5 vessels.  Gerry mentioned on the call today that they're at about 50% now, but I think that's due to their equity panic over the past few years.

 

Cash available for distribution at the end of 2012/early 2013 will be about $300mm.

 

If $200mm goes to equity for the year for all new vessels, that leaves $100mm for the dividend, which is about double what we're getting today, and that's assuming the whole thing is financed through equity.

 

I see this as a "worst case scenario" for the dividend.  It assumes all future growth will be executed using debt plus retained earnings, but it gives credence to the idea of $1.50/year in 2013.

 

[gaf63]

Thanks Val for posting the info from the conf.  Hopefully a replay is available

 

I like the idea of controlled growth over the 5yrs., and $100 mil for a 10,000 teu ship is a hell of a reduction from the costs of the 13500 ships

 

Things that I see that keep the div from going to 1.50 is the conversion of the pfd A shares in 2014, and the debt repayment that begins when all present ships are delivered- could be refinanced tho

 

Was the new investment vehicle mentioned as a partner in these new ships??

 

[ERICOPOLY]

- The new ship design means that fuel consumption for a 10k TEU vessel will be equal to that of a 5k TEU vessel.

 

Uhh...

 

So what happens to more than 1/2 of their current fleet?  They have a ton of these 4k-5k TEU vessels.  In fact, some haven't even been delivered yet -- are those toast after just 12 years in service?

 

And who is going to want their existing 13,100 ships in 12 years when new ones with similar fuel efficient design are just around the corner?

 

Are they going to be in demand when they come off lease?

 

30 year ship lifetimes?

 

How will scrapping those ships pay for the debt on them?  And if they don't, won't the creditors go after these new fuel-efficient ships that they plan to have built?

 

Isn't it better to scuttle the growth plans and pay out the dividends to ensure the shareholder actually gets to keep the distributable cash flow?

[Guest VAL9000]

Eric, I don't think the fuel efficiency thing is the be-all/end-all of shipping.  It's just another advantage.  If fuel efficiency were the deciding factor, these vessels would have kept slow steaming through 2010 while the liners brought on more capacity, and clearly that isn't the case.  Or, looking at another example, 8k vessels are significantly more efficient than 5k vessels, yet their introduction hasn't destroyed the market for 5k vessels, which continues to thrive.

 

I won't comment on the dividend directly, but I will say that the economics for ship building, the long-term view of the container trade, and Seaspan's particulars (scale, credit, credibility) are currently converging in an advantageous way.  I don't mind waiting it out.  I'm patient and long-term.

 

The slide deck and the recorded call were available to listeners earlier today.  If you're interested, it's a good listen.  Hearing Gerry Wang rip into the ship builders is worth the price of admission. :)

 

[gaf63]

just finished listening to webcast,

Wang is certainly fired up, and believes that SSW has advantage over the pricing and design of newbuilds

there were two things I heard that sounded new

1st, Wang mentions near the end that SSW wants to keep their fleet young , and said that they would dispose of older ships over time

2nd, said that the payout ratio was 20% and the board was looking at increasing the %, nothing definitive tho

[ERICOPOLY]

Perhaps I over did it a bit.  Well, good I hope we make more money.

 

There must be a lot of profit in those ships.  That's a huge price reduction.

[Myth465]

ERICOPOLY I think your points were fair and I really liked the way you inverted. Thinking about the ships in service and what happens if everyone upgrades or the market tightens was something I didnt consider. Wang seems to have covered all his corners. If he sales older ships as they age and keeps the fleet new. I think its a great investment, just doesnt match the thesis I set forth on the buy. I think they are doing whats best for long term shareholders like Val.

[Uccmal]

Myth, this is an easy stock to hold long term, for now -how's that for an oxymoron.  I keep sizing up my position slowly on the dips.  A 4% dividend yield at this time with a progressive increase coming. 

 

I have held this for over 2.5 years and gotten to know it - that's one of my favourite scenarios.

[Guest VAL9000]

Eric, I don't think you overdid it at all.  Honestly when I read your post I had a brief panic attack - both because I thought you were right on and because I was disappointed in myself for missing such a critical impact to the business model.  I initially wrote up a long response about how this isn't the first time efficient ships were introduced, and it'll take years to work through the fleet, and yadda yadda yadda..  it took me an hour or two of good thought and research before I came up with the counterexamples that I presented.

 

I guess this is my round about way of saying thanks for giving proper consideration to the other side of the coin.  I'm glad you're able to act as a counter balance to my enthusiasm regarding Seaspan.

 

[Myth465]

Myth, this is an easy stock to hold long term, for now -how's that for an oxymoron.  I keep sizing up my position slowly on the dips.  A 4% dividend yield at this time with a progressive increase coming.  

 

I have held this for over 2.5 years and gotten to know it - that's one of my favourite scenarios.

 

I agree but it just doesnt jive with my thesis. I was expecting a ramp up in dividend payouts. I bought at $9 or $10 and held for about 1.5 years. Then sold to raise capital, then bought options as a trade, now looking for an exit on the remaining portion of those. I think Wang is doing whats right, but I dont like the shipping business. It seems like a feast or famine deal. When its good its really good, and when not good its damn right brutal.

 

I want my feast, because I fear another famine.  Plus at my age I prefer capital gains. Without rises in the dividend we wont see many capital gains inmo. I think they are doing whats right, it just doesnt fit the original thesis.

[menlo]

World Shipping Council overview of liner ships (includes containerships, so somewhat relevant to SSW).  SSW does not appear to be a member.  Opens as a pdf.

 

http://www.worldshipping.org/public-statements/2011_Container_Supply_Review_Final.pdf

[Guest VAL9000]

I agree but it just doesnt jive with my thesis. I was expecting a ramp up in dividend payouts. I bought at $9 or $10 and held for about 1.5 years. Then sold to raise capital, then bought options as a trade, now looking for an exit on the remaining portion of those. I think Wang is doing whats right, but I dont like the shipping business. It seems like a feast or famine deal. When its good its really good, and when not good its damn right brutal.

 

I want my feast, because I fear another famine.  Plus at my age I prefer capital gains. Without rises in the dividend we wont see many capital gains inmo. I think they are doing whats right, it just doesnt fit the original thesis.

Myth, I won't argue with your thesis or your position on cap gains vs. your age, but I do want to look at the cap gains numbers.  Assuming the 5% yield sticks and the $1.50 is right, then in 2013 we're looking at $31.50/share incl. dividends.  Which is 85% in less than two years - about 36% per year.  Maybe I'm dead wrong on the div and the gain, but I think I'm in the 80% right zone, which still puts me at 28% per annum.  Maybe that's below the expected return in this market, but I'll take what I can reasonably assess as probable.

 

I'll note that during feast and famine, Seaspan's operations and customers have performed exactly as expected.  Their financing got screwed, though, so they're not impervious to flaw :D

 

PS. This is one of the things that keeps me from investing in a company like MSFT..  85% value creation for them means that they need to create about $160bn in present value gains.  It just seems like such an improbably large number.  Maybe I need more imagination or something, but I see SSW creating $1bn more quickly than MSFT creating $160bn.

 

[txlaw]

Thought you guys might be interested in the following article:

http://blogs.wsj.com/law/2011/05/18/slow-steaming-or-anticompetitive-behavior-the-eu-wants-to-know/

 

I have no dog in the fight when it comes to SSW.  Just providing info.

[Uccmal]

Myth, Building on Val's numbers, which are probably not wildly optimistic, I have a company that I have held for a long time that has:

1) Cut its dividend during a tight financing, and overgrowth period

2) Raised its dividend back up when cash flow returned

3) Has avoided unnecessary share dilution with some skilfull deals.

4) Appears to be have honest and capable management.

5) Appears to have a long term good client base.

6) May growth at 30% in stock price cagr over 2 years while having the margin of safety of a consistent 4% dividend.

 

Probably the most key thing for me is the correlation between owning companies for a long time and outsize returns.  All of my biggest hits by far have come from long term holdings.  Obviously some survivorship bias but often my biggest returns have come after any notional target price has been reached.  I also have other more speculative Graham and Dodds kicking around to fill the low return void of SSW :P

[Myth465]

I agree with you guys. I have a few singles and doubles and 2 grand slams (ATSG, and SD).

 

ATSG was gut wrenching but worked out exceedingly well. At my capital base I feel as though I need to stick and move. I have 3-4 long term holdings for 2 - 4 years. SSW is just in an industry I dont like, and I dont like the focus on growth. I have too many stocks tied to oil prices, global recovery, and rising dividends lol. The market was under supplied, then fairly supplied, then oversupplied due to world wide recession, then slow steamed, and now we are under supplied again.

 

I dont feel comfortable betting on world wide growth, China's continued rise, or a rationale containership market. Which inmo is what you have to do if you hold SSW for the long term. Shipping is just one of those industries, ERICOPOLY inmo is correct and SSW should pay its shareholders now and perhaps form another venture to buy other ships. Rising the div to a 60% payout ratio would do wonders for the shareprice today inmo.

 

 

Also empire builders are well empire builders. These guys will focus on growth until something turns the market. Then they will be on the defensive again. At least at FRO or NAT. Shareholders got massive dividends during good times. Also the customers performed well, but what happens if China slows down just from being overheated / inflation / other woes. I think they are doing the right thing, and also believe they have covered their bases in terms of the model. I also really like the efficiencies on new ships which act as a call option on rising oil prices. That combined with selling off older smaller ships will make SSW very relevant.

 

I will be in and out, and will probably be back for the long term after some sort of shock. But in this environment I cant buy and hold given where they want to go.

[Myth465]

Good press in the journal. Cspan lol.

 

http://online.wsj.com/article/SB10001424052748704281504576331491017789286.html

[Guest VAL9000]

Good press in the journal. Cspan lol.

 

I remember Seaspan got some play on Cramer once.  "I'd rather watch C-SPAN than buy Seaspan!" and then he hit some bearish button.  The hilarious part was when Seaspan went on his recommended list a few months later.