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Seaspan Corporation (NYSE: SSW) and Navios Maritime Midstream Partners (NYSE: NAP) both pay eye-popping double-digit yields, with Seaspan's at 11.3% and Navios' at 16.7%. When payouts get that high, it is usually a sign of trouble. While that is not necessarily the case with these two, one company does have a greater ability to maintain its lucrative payout. That makes it the better buy for income investors with a very high risk tolerance.
Comparing the balance sheets
The shipping sector is a capital-intensive industry because ships are expensive. As a result, ship owners typically borrow heavily to grow their fleets. That is certainly the case when comparing the balance sheets of these two companies:
Data sources: Seaspan Corporation and Navios Maritime Midstream Partners. (Data as of the end of the second quarter.)
As the chart indicates, Seaspan Corporation is by far the larger company. Not only does it have substantially more total debt but it uses more leverage on a percentage basis. However, it does have a lower leverage ratio on an earnings basis.
That said, these two are pretty even when it comes to their balance sheet.
Contrasting the business models
These two companies also operate similar business models. However, Seaspan Corporation is the world's largest containership lessor, controlling 3.8% of the global containership fleet and is twice the size of its nearest rival. The company currently leases its 89 operated vessels to shipping companies under long-term time charters. As of the end of the second quarter, its average contract had nearly six years remaining with its total contract backlog totaling $6 billion in future revenue. That long-term backlog provides the company with significant future revenue certainty. Because of that certainty, Seaspan pays a pretty generous dividend, though last quarter it only paid out 32% of its cash available via dividends, meaning it covered its payout three times over.
Navios Maritime Midstream Partners, on the other hand, owns and operates six crude oil tankers, which are under long-term employment contracts with international oil companies and large vessel operators. Currently, its contracts have an average of 4.8 years remaining with 100% of its revenue fixed in 2016 and 2017 and 99.4% fixed in 2018. Overall, it has more than $500 million of revenue in the backlog. Because of that revenue stability, the company pays out nearly all of its cash flow via distributions to unitholders. Last quarter, for example, it paid out 87% of its operating surplus, which equates to a 1.14 times coverage ratio.
Both companies have very similar business models and cash flow security. However, Seaspan Corporation's much larger fleet and stronger dividend coverage give it the edge.
Considering the upside
Seaspan Corporation's rise to the top of the containership leasing segment came primarily via organic growth. It plans to continue down that path and has eight more ships scheduled to be delivered next year at a total cost of $470 million in remaining capex. The company already has the bulk of that capital lined up, after raising more than $1 billion in capital via multiple financing transactions this year to fund its capex requirements and refinance upcoming maturities. Those new vessels will supply the company with additional cash flow to maintain, and potentially expand its dividend.
Navios, on the other hand, takes an entirely different approach to growth, utilizing drop-down transactions from its parent company Navios Maritime Acquisition (NYSE: NNA) to expand its fleet. Sinceits IPO, the company has acquired two vessels from Navios Maritime Acquisition, and it currently has the option to purchase five more. In addition to that, it has the right to buy any crude, product, LPG, or chemical tankers within the Navios Group that have time charters lasting more than five years. Finally, it is selectively exploring the market for third-party acquisitions. The only hindrance to growth is its access to capital, which given the company's already elevated leverage and relatively small size, could prove problematic.
While Navios has tremendous growth potential thanks to drop-down transactions from its parent company, Seaspan Corporation's upside is much more visible due to the vessels scheduled for delivery next year.
Seaspan Corporation has three distinct advantages over Navios. It has much larger scale, pays out a smaller portion of its cash flow in dividends, and has clearly visible near-term growth. Because of those factors, it has a better ability to maintain its payout. Therefore, it is the better buy between the two for investors that aren't afraid of the risks associated with owning a highly leveraged shipping company.
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Matt DiLallo owns shares of 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.