Preferred stock with fixed rate coupon of 8.50% - Too good to be true?

[Roks]

Hi all.  I wanted to get your thoughts about a possible perpetual preferred stock purchase. Triton International Limited (TRTN), the world's largest lessor of shipping containers, recently released its first preferred shares. 

Below is the info I've found.  Is this too good to be true? 
     "Triton International Limited 8.50% Series A Cumulative Redeemable Perpetual Preference Shares (TRTN-A) pays a fixed qualified dividend at a rate of 8.50%. The
      new preferred stock has a 'B+' Standard & Poor's rating and is callable as of 03/15/2024. It cannot be converted to common shares.  Currently, the new issue trades
      above its par value at a price of $25.50 and has an 8.33% Current Yield and an 8.01% Yield-to-Call."

A few folks I know would like to invest a large sum of their portfolio into this, sighting the Rule of 72 and saying that they can double their investment in 8 yrs.  I still think it's risky and they are better off investing in a Vanguard index fund like VTSAX or some other index fund that tracks the S&P.     

An article I read said the following: 

"As of Q4, TRTN had a total debt of $7.45B, ranking senior to the newly issued preferred stock. The rank of the new Series A preferred shares is junior to all outstanding debt and equal to the other preferred shares of the company. The Series A is currently the only preferred stock issued by TRTN."
https://seekingalpha.com/article/4250622-triton-international-limited-first-preferred-stock-ipo-now-trading-nyse
 
Here is a link to a more favorable article explaining why this could be a good investment: https://seekingalpha.com/article/4268352-world-turns-triton-internationals-containers-will-deliver

What do you think?

[secondcor521]

Well.  The question would be, why does this company need to pay 8% to 8.5% for a loan?

The only reason is that they can't get a loan at a better rate.  Which probably means they don't have any assets that they can collateralize for the amount that they want to borrow and/or there's a decent chance their business plan doesn't work out and they don't pay you back.

This new debt is subordinated to $7.45B of other debt.  At ~$350M of net income, that's over 21 years of debt.  Blech.

I don't know why the company can't borrow against the containers it owns (apparently that's what the $8B in "Other assets" are on the balance sheet) at a better rate.

I don't buy the CEO's explanation that borrowing at 8.5% to repurchase common shares at a 6% dividend rate makes any sort of sense at all.  Yes, if you think your shares are undervalued then logically it does make sense, but that's one heck of a big bet that the market is wrong about your company.

The Seeking Alpha article - at least the first portion that I read/skimmed, talks mostly about 2018 and 2019.  If you look at Yahoo! Finance and the TRTN history there, 2017 and 2016 don't look as good.  I'd want to know why before buying.

[Maenad]

IIRC, a B+ S&P rating is terrible. And high rates of return go along with high risk, always. You've got money locked up for 5 years before you can get it out, in a high-risk investment. Yuck.

[Andy R]

Too good to be true?

Yes.

[MrSpendy]

If it is like most preferred stocks, it is perpetual (meaning it never matures), so if the cknpany’s Prospects improve or rates go down, they will call the bonds in 2024 and you don’t get any upside from aforementioned improvement via  price appreciation. You just get your $25 par.

If the company’s prospects get worse or rates go up, then you are lending to a crappy cyclical company in a subordinates instrument with no maturity. Look out below.

Heads I don’t make much, Tails I lose a lot.

Retail preferreds are designed to raise cheap money from yield pigs. In a taxable account the risk/reward is even worse.

[Financial.Velociraptor]

There is a closed end fund "JPS" invested in a basket of prefereds that is currently paying a few ticks over 7%.  I have owned since Feb of 2014 and it has been very stable and rode out the December correction nicely.  I have 10.76% in price appreciation and 54.53% total return in that span.  I'd be skeptical of the risk in a single company in a cyclical industry, tons of debt, and a "junk" credit rating.  For my money, the diversification of JPS makes it a better deal.

[Roks]

Thank you, all.  If the company were to call the preferred shares in 2024, wouldn't you get at least 8% return up until the company calls the shares? 

[secondcor521]

Thank you, all.  If the company were to call the preferred shares in 2024, wouldn't you get at least 8% return up until the company calls the shares?

Yes, but they would call the shares at $25.  You may have paid more than $25 for them, so to the extent you paid more, that would be a loss to you.  I'm pretty sure that's why the yield-to-call figure cited is lower than the coupon rate.

And of course, that's assuming that the company makes it to 2024 without going bankrupt.

Another thing that bothers me about this company is that it's treasury share balance is negative for the latest year reported.  Only because I don't know what that means or how that could happen.  But it doesn't look right.

[Telecaster]

A few folks I know would like to invest a large sum of their portfolio into this, sighting the Rule of 72 and saying that they can double their investment in 8 yrs.  I still think it's risky and they are better off investing in a Vanguard index fund like VTSAX or some other index fund that tracks the S&P. 

Apples to oranges.  Preferred stocks don't trade like stocks, they trade like bonds.   So, this is money that should be going into the bond portion of your portfolio. 

Putting a lot of money into any single security is risky, so I wouldn't put a large portion of my portfolio into anything.  If they want to do this, I'd recommend investing no more than they care to lose.    An easy way to safely invest in preferred stocks (if one cares to do so) is an ETF, like PFF, or PGF.   

[Rob_bob]

Today that preferred closed at $26.02 so the current yield you would receive is 8.2%.  If it were called in 2024 you would be paid $25 per share.

The dividend on preferred shares needs to be paid before the dividend on common shares, and if the payment is suspended it needs to be paid in full before the common share holders get paid so the divy is safer in comparison.

I sold cash secured PUTs on the common shares, the premium I received on the cash I need to keep in my account amounts to 8.65% for about a 7 month time period.

[Rob_bob]

IIRC, a B+ S&P rating is terrible. And high rates of return go along with high risk, always. You've got money locked up for 5 years before you can get it out, in a high-risk investment. Yuck.

No, the shares trade daily just like any other stock and usually with less volatility like a bond so you are not locked 5 years.  However the trading volume may be thin.