With markets down sharply and fixed income stocks posting the worst start to a year in history, plenty of bargains are sure to be available. Even with rising rates and inflation, the decline in fixed income, especially lower duration issues, is overdone in our view and in many cases, “throwing the baby out with the bathwater”. We have seen these fixed income panic declines many times over the past few years, providing windows of opportunity to secure excellent returns.
An opportunity has come to our attention which we believe offers a very attractive risk/reward ratio, with high return and a lower level of risk as an investment grade company. The issues in mind are the preferred stock issues of Triton International Limited (NYSE: TRTN), the Series A and Series B show.
Triton, founded in 1980, is the world’s largest freight container lessor with a market capitalization of nearly $4 billion. Their owned fleet consists of over 7 million twenty-foot equivalent containers and the company is a major supplier to all major container shipping lines in the world. The Company also purchases containers from container manufacturers, shipping line customers and other sellers, and resells these containers to container retailers and users.
We invite readers to view the company’s first quarter presentation for further details on the company, financial performance and industry. The company delivered record first quarter results and the outlook for 2022 remains strong. The company’s strong position has been reflected in its share price this year. Even though the market is in bearish territory, Triton stock has remained stable since the start of the year.
Another key aspect to consider is Triton’s investment grade corporate rating, a reflection of the company’s superior credit quality, which was granted by S&P in March 2021 with a BBB- rating. This rating was confirmed by S&P in October 2021 and was followed by an Investment Grade rating by Fitch the same month. Fitch offered this comment:
Triton’s ratings continue to reflect its well-established market position as the world’s largest shipping container lessor, experienced management team, strong track record of operating through various cycles, predictable cash flow generated primarily through longer term leases, strong risk controls and lease terms, the standardized nature and relatively long useful life of containers that moderate residual value risk, adequate liquidity and appropriate leverage .
Overview of Preferred Shares
Triton offers four series of preferred shares, A, B, C and D, but the ones we discuss for review are series A and B. Triton preferred dividends are qualified, which means they are more attractive in accounts taxable. It should also be noted that, by rating convention, the preferred issue itself is rated two notches below the corporate rating of BBB-, thus the preferred issues themselves are rated BB.
TRTN Series A: 8.50% cumulative dividend yield, redeemable at par on 03/15/2024. Series A is trading in the high $25 range and, at the time of this writing, has a bid/ask of $25.70-$26.00. Dividends are paid quarterly on 3/15, 6/15, 9/15 and 12/15.
At a price of $26.00, the current yield is around 8.2%. Importantly in this case, the yield to call is around 7.05%. With a high dividend yield of 8.5%, it is highly likely that the company will redeem the Series A issue when it is redeemable in March 2024 at par $25.00 and investors should assume that will be the case. Here is the price chart for 2022. At the end of 2021, TRTN-A was trading at around $27.40.
B-Series TRTN: Cumulative dividend yield of 8.50%, redeemable at par on 09/15/2024. Series B is trading in the middle $25 range and, at the time of this writing, has a bid/ask of $25.35 to $25.45. Dividends are paid quarterly on 3/15, 6/15, 9/15 and 12/15.
At a price of $25.45, the current yield is around 7.9%. The call yield is approximately 7.85%. As with Series A, it is highly likely that the company will redeem the Series B issue when it is redeemable in September 2024 at par $25.00, but with a lower dividend rate at a lower chance than that of A. Here is the price chart for 2022. At the end of 2021, TRTN-A was trading at around $27.31.
Will Triton redeem these favorite numbers? There is no way to know for sure and it certainly depends on market conditions in 2024. However, for a top quality company, paying returns above 8% for preferred shares is very high and remains a burden. financial high for the company. In January 2020, well before it achieved its investment grade rating, the company issued Series D Preferred Shares at a yield of 6.875% which now trades at approximately $24.00 per share for a current yield about 7.2%. So even in today’s depressed market, Triton’s preferred yield clearing rate is well below the 8% level. Series A is certainly much more likely to be called given its higher rate and status as the first issue to be called.
Assuming Triton redeems Series A and B, an investor can therefore view an investment in A as a tax return of 7.05% over a holding period of less than 2 years for a high quality issuer. An investment in B offers a tax return of 7.85% for approximately 2.5 years to a high quality issuer. In our opinion, holder A offers a lower return to follow due to the higher possibility of being followed, while holder B assumes that he is less likely to be followed.
What happens if A and B are not tracked in 2024? Thereafter, the investor continues to benefit from a tax yield of approximately 8%. At any time after 2024, the company can still call the preferred issue. Given the issuer’s quality rating, this is an attractive return, even over the longer term. It is clear that a fixed maturity date would reduce the duration risk, but if that were the case, the yield would be far from 8%. If investors are more interested in a shorter term holding, then A is a better choice because it is more likely to be followed.
In the current sinking fixed income market, there are plenty of bargains to choose from. One of our goals is to increase yield as well as credit quality, as these opportunities do not arise often. We believe that at some point this year, investors will suddenly notice these very high returns for companies that are doing very well and prices will rise again. Triton’s Preferred Series A and B offer high yield that is particularly attractive in taxable accounts, with limited credit risk in our view.
Please note that Downtown Investment Advisory currently holds TRTN A&B in client and personal accounts, and may have added/will add positions at any time before or after the publication of this article.
It is important to note that fixed income investments such as high yield bonds, BBs and lower preferred shares and baby bonds are by definition not “investment grade” and therefore only suitable for investors willing to accept a higher fixed income risk profile. High yield fixed income investments may not be suitable for all portfolios. Therefore, consider these investments only as part of a broader investment portfolio allocation to various assets of all risk profiles.
Please see Downtown Investment Notice profile page for important disclaimer language, which is an integral part of this article.