“Dozens of the world’s wealthiest are watching their income soar here…
“… it’s not just because of its warm, tropical breezes and its pristine, crystal-clear waters.
“And it’s not just because there’s no crime and little-to-no unemployment.
“You see, this island paradise differs from so much of the developed in a much more fundamental way…
“Here, hard work and saving are rewarding – not penalized with confiscatory taxes and near-zero interest rates.
“Here, investors aren’t burdened with income taxes, capital gains and stifling bureaucracy…
“Instead, they are allowed to keep and grow what they earn.
“The result: this little island is now the third-richest country in the world, with a per-capita income of $86,000.
“It’s no surprise why some of the world’s wealthiest have decided to park so much of their money here….”
That’s part of the intro of Ian Wyatt’s latest ad for High-Yield Wealth, but really… he had me at Buffett. That tease about “Buffett’s island” got my attention, just as it was designed to catch your eye… Warren Buffett is in the headlines these days, not just because Berkshire Hathaway is celebrating its 50th anniversary under his management, and preparing to host probably their largest-ever annual shareholder lollapalooza in Omaha in a month (I’ll be there), but because they just helped finance the huge deal to merge Heinz and Kraft and, well, the man seems to delight ever more in appearing on television these days. So I’ve got Buffett on the brain anyway, and even added a few more shares to my Berkshire holdings last week… I’m nearly powerless to resist a Buffett-related tease.
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Doesn’t mean I’ll like or buy the stock, of course — but let’s find out what it is, shall we?
First he gives an illustration of the tax breaks of “Buffett’s Island” — which tell us that, yes, it’s certainly one of the offshore tax shelters that surround the US…
“Say, you had a $100,000 portfolio invested here… and it returns 15% a year (a great return). If that money were invested in the U.S., you’d have to pay an ordinary income tax on your gains and you’d be left with a $50,000 profit after 5 years. Not bad…
“But when you invest on this island, you don’t have to pay these taxes… and your profit balloons to $77,000.
“That’s $27,000 that would normally be forfeited to the U.S. government that you now get to keep and spend as you please.
“No wonder some of the greatest investors and financial minds in America have joined Warren Buffett and invested millions of their personal fortunes here, including:
“Michael Bloomberg… Bill Gates… George Soros… Ross Perot… and hedge fund billionaires John Paulson and David Einhorn.”
Well, if “you” is a US citizen, you owe taxes on income no matter where you make it — though yes, if your fund are tied up in a tax shelter you can hide from taxes as you accumulate the money to some degree… but if you sell out of that portfolio and bring the money back to the US, where you need to spend it, you’ll owe taxes on your gains. Not so different from an IRA. (Yes, I’m oversimplifying — and I’m certainly no expert on tax havens — but you get the idea)… but then again, if you just buy Berkshire Hathaway shares you don’t owe any tax on them until you sell, either (they don’t pay a dividend, and like most corporations it’s not a pass-through entity so they don’t pass any tax liability to their shareholders).
Anyway, I’m getting ahead of myself. What is the point of Wyatt’s tease of this tax shelter “Buffett’s Island”? And for that matter, which island is it? More clues:
“You can join Buffett and invest here, regardless of your net worth… whether you’re working or retired… or you have $500 or $5,000 to invest…
“And you can do it today, in a matter of minutes, right through your brokerage account (more on this ahead).
“In fact, it’s so easy… so profitable… a select few Americans are using this paradise to fund their retirements… and collect a steady stream of income – all from the comfort of their home (even though living here would be great)….
“These investors are actually collecting pure, old-fashioned dividends… paid out by publicly traded companies based on this island.
“The thing is, these are much, much larger than your average payouts.
“That’s because, as I mentioned earlier, companies here don’t have to forfeit their profits to the government… no matter how much money they make.
“That means, they’re able to generate much larger cash flows than companies based in the U.S.
“And the best part is… these offshore companies siphon all their excess cash to shareholders in the form of big dividends.”
So… which high-yield company from a tax-shelter island is Wyatt pitching to us? We finally get to the specific clues:
“6% Dividends Growing Every Quarter
“Our first high dividend company is located in a small office building across the street from the island’s most prestigious yacht club.
“Here, a small staff of 150 people manages a worldwide business that earns $463 million a year.”
So… what business are they in?
“This company has increased revenues 13% a year (for 7 straight years).
“And, by my projections, it will increase revenues to $590 million in 2015 compared to $529 million in 2014….
“… this lean and profitable firm is in the shipping business… except that it owns no ships or ports…
“It’s in the shipping container business.”
You know what shipping containers are, right? They’re often referred to as intermodal containers, with the standard ones being those 20-foot boxes that you see on rail cars, being towed on trailers by trucks, or stacked up like giant legos in shipyards or on massive container ships. There is some variation in sizes, but they are generally close to standardized and are commonly described in TEUs — which stands for twenty-foot equivalent units, though I understand that most cargo is now shipped in 40-foot containers that would count as 2 TEUs. Most containers carry standard consumer goods, like electronics or toys or clothes or other general cargo, but there are also specialized containers for liquids (tanks in TEU-sized frames), refrigerated or frozen cargo, odd sizes (open tops or flatbeds), etc. Lately, used containers have also been a trendy architectural commodity, partly because they’re cheap and plentiful — you may have seen them being used for hipster modernist mountain cabins when they’re not converted into “permanent” storage facilities after their traveling days are done.
And there are a few publicly traded companies whose primary business is owning and leasing out containers — presumably their businesses are not all identical, some just deliver triple net lease containers to shipping companies for long lease terms, some manage and position the containers more actively around the world for shorter time charter orders, some buy and sell containers more actively than others, etc. Which one is Wyatt pitching?
One more small crop of clues:
“… this company may be based offshore, but it’s not an ADR or listed on a foreign exchange.
“It’s listed on the NYSE. And dividends are paid out in U.S. dollars – so you’re getting your full payment.
“Which is great if you’re looking for more income, because right now this company is yielding close to 6.2%.
“And it’s increasing payouts consistently.”
So which one is it? This is the largest shipping container lessor in the world, Textainer (TGH).
And yes, like many shipping (and insurance) companies and other firms who see great value in avoiding corporate taxation, they are headquartered on “Buffett’s Island” — which is the tax shelter we know and love as Bermuda. You can insert your other favorite tax haven here, whether it’s one of the Channel Islands off the UK or the Cayman Islands in the Caribbean or somewhere else, but Bermuda leads them all when it comes to genteel corporate home offices. Many of which, of course, are little more than receptionists with post office boxes — Textainer’s headquarters is at Century House on Par-la-Ville road in Hamilton, Bermuda, not exactly across the street from the Royal Bermuda Yacht Club (but within a five-minute walk)… though their administrative offices are in San Francisco and they have a dozen other locations around the world for marketing and logistics.
And they have consistently paid a dividend since they went public about eight years ago, and the share price and dividend payment have roughly doubled in that time. The dividend payments match exactly the chart that Wyatt included in his ad, so that’s enough final confirmation for me that we’re talking about Textainer and not about one of the other major publicly-traded container lessors like TAL International (TAL) or CAI International (CAP) … though, for extra confirmation, both of those are headquartered in the US. There are others in Bermuda, too, like Cronos (which was bought recently by a Chinese shipping firm, I think I owned some shares of Cronos a decade or so ago), but none that are particularly large or publicly listed in NY from what I can tell. The other numbers are a little bit old, I expect — they had revenues of over $560 million in 2014, not the $520 Wyatt noted as a likely, and the 2015 average analyst estimate is now for about $588 million, right in line with the $590 he cited (earnings per share growth is expected to be in the 4-5% neighborhood for the next couple years, for whatever that’s worth).
Will container shipping make you rich? Probably not, most analysts are predicting low-single-digit earnings per share growth and have TGH rated a “hold,” and most of their containers are on longer-term lease so they wouldn’t get an instant boost if demand suddenly shot through the roof… but the yield is pretty nice. They are levered up, as most leasing companies are — but they are not as levered as TAL or CAP (1.5X debt to equity for TGH, more than 2X for the others), which is perhaps part of the reason that TAL and CAP have both provided a substantially higher shareholder return for the past year, and TAL has been a much stronger performer long-term (total return of about 180% in five years, versus 80% for TGH). Both TGH and TAL have large dividends, though TGH has a substantially lower payout ratio so, all else being equal, their payout may be more likely to grow (or be sustainable). I haven’t scoured the balance sheets of all these companies, but TGH looks like they’re in pretty good shape from the basic info in their most recent investor presentation — their cash flow looks pretty good, with lease payments and dispositions more than enough to cover the debt on their portfolio and the cost of acquiring replacement units for the ones they sell, and it even leaves some left over for them to finance growth (borrowing to increase the size of their container fleet).
They have had a ready “backlog” available for quite a few years, in that they also managed a fleet of externally owned containers that they’ve been buying back from their partners, but they’ve been gradually buying that managed fleet so there aren’t many of those left to purchase… not that they can’t just order their own, there’s no apparent shortage of manufacturing capacity in the TEU world, and there’s nothing secret or proprietary in the building of new containers so lots of folks can build ’em pretty cheap and quick if they’re needed. They seem to indicate that they see growth potential in the more high-value-added containers like refrigerated and tanker units, though both are a small portion of their holdings now.
So, yes it’s a high yield, yes the business is probably pretty stable unless container shipping falls apart again or they get crushed by higher borrowing costs, neither of which seems imminent. They did sustain their dividend when container shipping collapsed briefly in 2009, but they didn’t grow it — and they also haven’t increased the dividend over the last seven quarters, TAL has been a much more consistent dividend raiser if that’s what you’re looking for.
How about Wyatt’s other pick?
“Based on Buffett’s Island, this unique insurance company pays no taxes on its profits – making it legally obligated to hand them to investors like you!
“And as a reinsurer of natural catastrophic events – windstorms, hurricanes, earthquakes – it is immune to the market risk ordinary insurers are exposed to.
“Barely two-years old, it also has rock-solid financials – clearing the way for years of steady growth.
“Profit margins are a solid 33%, while debt is almost non-existent.
“And the best part: this company has more than doubled dividend payouts over just the last year.
“Grab it today, and you can lock in a fat 9% yield.”
No, there’s no requirement that I’m aware of that companies in Bermuda have to “hand” their profits to investors because they don’t pay taxes. Such requirements are the province of pass-through entities like MLPs, trusts, BDCs and similar entities. Bermuda corporations are just corporations who don’t happen to pay corporate tax in their home country, they can generally do whatever they want with their profits just like any corporation anywhere else. Lots of insurance and reinsurance companies are headquartered in Bermuda, many of them pay dividends and many opt not to (or to pay very tiny dividends).
Which one is this? I suspect that it’s one that actually has committed to paying out most of their income, this is very likely Blue Capital Reinsurance (BCRH), which is essentially a catastrophe reinsurance fund spun out by Montpelier Re a couple years ago. Montpelier is being acquired by Endurance, but it sounds like the relationship with Blue Capital will remain — this is basically a division of Montpelier that uses their underwriting to give outside investors exposure to catastrophe insurance.
Why would you want to do that? Well, this is a collateralized insurer — so they essentially hold the cash to pay out claims on short-tail property and casualty insurance, related primarily to catastrophes (hurricanes, ice storms, etc.), and if they underwrite profitably (meaning, they pay out less in claims than they take in in premiums) then they return 90% of the profits to their shareholders/investors in the form of dividends. Investors like it because it’s a new asset class — this is not an investment-focused reinsurance company, they’re not trying to make a big profit on the money they hold while they wait to see if there are catastophes, they are solely focused on insuring against catastrophes and making a nice profit if they price the insurance right and big catastrophic events don’t happen.
So the return is determined not by the performance of their stock portfolio or by interest rates, but by whether or not they underwrite well and whether or not we have a big hurricane season (that’s oversimplifying a little bit, but not too much)… investors love non-correlated returns, which is why there’s so much money flowing into insurance in general and into reinsurance specifically (insurance underwriting in general requires a big, operating business with lots of agents and partnerships and overhead to sell individual policies — reinsurance is insurance for insurance companies, for baskets of insurance policies, and it’s more of a “wholesale” operation and appeals more to those who want to get investment returns rather than build a relationship-focused business… hedge funds that go into insurance because of the investable float it provides find a much easier entry in reinsurance, Greenlight Re and Third Point Re, both of which I own and have written about many times, are reinsurers).
As long as you keep that in mind, that the returns will be determined largely by whether or not we have a bunch of hurricanes or other big insurable catastrophe losses in a given year, and your gains will likely be almost entirely in the form of dividends, then this is an interesting possibility for non-correlated income in a low interest rate environment. There’s not a big reason for BCRH to trade at a meaningful premium to book value, though it could go up a couple dollars if optimism returns and they get priced closer to book, and the book value won’t increase because they don’t keep their earnings to reinvest and compound them so it would be frankly shocking to see the stock go much above $20.
It’s also quite possible that the continuing pressure on reinsurance rates will get worse, since years without catastrophes tend to keep insurance prices low even when there isn’t too much capital in the reinsurance business (as there arguably is now), and book value and dividends CAN both decline. They could certainly have losses that cut into book, and the dividends could be much smaller in bad years, which would make yield-focused investors sell the shares, which might make it trade at a bigger discount to book value — so don’t go into this one thinking that the stock is guaranteed to keep that $20 book value. They won’t lose it by investing badly, like another insurance company could, but they could lose it by underwriting badly or getting unlucky with disasters. On the positive side, they do trade at a substantial discount to book value and have managed to slightly increase their book value in their first couple years (they went public with a book value of $20 and and IPO price of $19.45, now book value is $20.63 and the shares trade at $17.30… Montpelier Re has bought more of the shares since the IPO, presumably because they trade at a discount, and now owns a third of the stock).
The dividend looks like it’s set at an expected minimum of $1.20 per share, but the final quarterly payout of the year can be larger (or presumably smaller) to reflect the earnings performance for the full year. Last year the total dividend was $1.56 (on $1.72 in earnings), so that’s where the current 9% yield comes from — if you assume a more conservative dividend of $1.20 this coming year, that would be a yield of 6.9%. Still pretty decent. It’s probably better not to think of it as a company, but to think of it as a catastrophe insurance investment pool that you’re buying a piece of — they pay management fees to Montpelier and have some minor administrative expenses, but they basically bet against hurricanes and earthquakes and the like, and send you most of the earnings if they’re right. I have not looked through their offering documents, and I don’t know exactly how much risk they’re taking on, but the evidence of last year is that they are supremely profitable when there are no bit insured catastrophes. You can see their annual report here if you’d like to dig in to the details a bit more.
So … interested in “Buffett’s Island” and the stocks you can buy who hide from taxes there? These are both fairly reasonable and stable dividend payers over the past year, though they are, of course, both exposed to large market forces outside their control — and even though they should not be directly impacted by interest rates in a dramatic way, these are income investments and it’s quite likely that the shares will react to interest rate changes. I’ve been personally being fairly cautious on these kinds of investments (to which I’d add REITs and MLPs) in recent months, but that’s less because there’s a real structural problem with any of these stocks and more because I think a selloff in income investments is possible at some point this year and I’d like to be ready for a buying opportunity. If you’ve got any sentiment to share on BCRH or TGH — or on other dividend investments, for that matter — feel free to share it with a comment below and help us all to get just a wee bit wiser. Thanks!
P.S. Yes, Warren Buffett does also have some Bermuda insurance companies under the Berkshire Hathaway umbrella, and many (if not most) insurance and reinsurance companies are either based in Bermuda or have a “Bermuda insurance” division, the island is still a British territory, and insurance and tourism are their only real industries. The first offshore captive insurance firms were set up there in the 1950s, and they’ve maintained a strong market share despite the rise of the Cayman Islands, Luxembourg, the Channel Islands and others, including the growing receptiveness of some US states to captive insurance companies (there are hundreds in Vermont, for example)… but I don’t think I’ve ever heard anyone else call it “Buffett’s Island” — in fact, most of the press accounts connecting Buffett to Bermuda are in reference to Berkshire firing the CEO of Benjamin Moore for taking his execs on a Bermuda cruise.
Disclosure: I own shares of Berkshire Hathaway, Greenlight Re, and Third Point Re among companies mentioned above. I don’t own any other stocks mentioned in the article, and won’t trade in any covered name for at least three days after publication.