A Solid 6% Yield, No K-1, Very Low PEG Ratio, 65% Payout Ratio, Industry Leader Turnaround

Summary

• This stock yields 5.8%, with a 65% payout ratio.
• It's the leader and only dividend play in its niche industry.
• Its PEG ratio is only .25x, the lowest we've seen in years.
• Its industry turned around in 2017, and the supply/demand balance favors higher prices in 2018.

Are trade war jitters making your portfolio nervous? Imagine if you were the world's biggest shipping container lessor, like Triton International (NYSE:TRTN), a company which emerged as an industry leader, after a merger with TAL International in mid-2016.

(Source: TRTN site)

TRTN's merger with TAL took it from a 13% share to a 26% market share in the container leasing industry:

(Source: TRTN site)

TRTN's price/share, along with those of competitors CAI International (CAI), and Textainer Group Holdings (TGH), took a big hit in February, when management from CAI and TGH warned of "increased competition from container equipment lessors who are active in the market," and that, "yields on new leases have slightly moderated as competition increases." These statements were made on the CAI and TGH earnings calls, which occurred a week before TRTN's 2/22/18 Q4 earnings report was issued.

All three share prices also were pressured by tariff/trade war talk, and fell along with the general market earlier in February:

The thing is this industry has made quite a turnaround. After struggling with depressed pricing in 2015-2016, container demand and pricing continued to improve in 2017, pushing up dry container lease rates and used container sales prices.

TRTN's management referenced this on the Q4 2017 earnings call.

"We are now seeing a sustained recovery. The powerful turnaround in both market dynamics and market lease rate levels has helped to stabilize this trend during the course of 2017. This rebound has continued into the first quarter, and we're expecting further improvements throughout the whole of 2018."

"We're back to and surpassing the strong revenue earnings and cash flow levels we achieved prior to the market challenges in 2015 and 2016."

"We've also continued to see depot inventories in Asia, for both us and our competition, lowest levels ever recorded, with many of the stocks already booked by our customers. Ongoing demand currently remains strong with little or no surplus container supply in the market."

(Source: TRTN site)

As a result of stronger demand, TRTN's fleet has seen much improved utilization over the past five quarters.

"The shortage of containers in the market relative to demand has continued to push overall utilization higher. Our fleet utilization is now well over 98.5%. We're also continuing to see improvements in our refrigerated container performance driven by the fact that there has been limited investment in new equipment in this sector over the last 24 months, and we're now well into what promises to be a strong season for reefers that usually lasts through May." (Source: Q4 2017 earnings call)

Note to all stoners: In this industry, "reefer" means refrigerated, not something you pass back and forth at a Dead concert.

(Source: TRTN site)

Earnings:

You can see how the merger and industry turnaround really ramped up TRTN's revenue, operating and net income, and EBITDA growth in 2017, with all categories hitting very strong growth, some of which might be called stratospheric, as some categories swung from losses to large gains in certain quarters.

TRTN continued to hit company records in Q2, Q3 and Q4 2017 in leasing revenue, operating income, total and per share net income, and pre-tax adjusted net income. In Q4 2017, there was a one-time tax benefit of $139.4 million recognized as a result of the reduction in the U.S. statutory corporate tax rate as part of the Tax Cuts and Jobs Act:

Management kept a reasonable lid on equity issuance in 2017, with the share count up ~9% in 2017. They did a secondary of ~5.4M shares at $32.75/share in the fall of 2017.

They also kept the dividend flat in 2017, which might seem stingy, given the huge growth in 2017, but there was a good reason for that strategy. Take a look at the improvement in their dividend payout ratio, which they got firmly under control in 2017, bringing it from an unsustainable 192.51%, down to a reasonable 65%.

Distributions:

If your dividend income is heavily skewed to a Feb/May/Aug/Nov cycle, you might appreciate TRTN's alternative schedule. They go ex-dividend and pay in a March/June/Sept/Dec schedule.

At a price of $31.05, TRTN yields 5.80%, not as high as some of the companies you'll find in our High Dividend Stocks By Sectors Tables, but certainly high enough to give it a spot in the Services section.

We took a look at TRTN's dividend coverage two ways - via net income and adjusted net income. Both metrics showed steady quarterly improvement in their payout ratios, with the net income payout ratio averaging just 40.72% in 2017.

However, the plain net income figures included the one-time effect of the Tax Act windfall in Q4 2017, so the adjusted net income figures tell a clearer story. Again, there was clear improvement each quarter - the adjusted net income payout ratio improved from 93.75% in Q1 2017, all the way down to 52.94% in Q4 2017.

Moving forward, we feel that it's reasonable to believe that management should be able to sustain its current dividend at a 50-60% payout level, and perhaps even begin to raise it.
Taxes - TRTN issues a 1099 at tax time. Its payouts are tax-sheltered, as a return of capital. The caveat here is that return of capital decreases your cost basis, so, if you sell your TRTN shares, you'll need to take that into consideration.

(Source: TRTN site)

Risks:

Trade Wars - An all-out trade war between the US and China would hurt this industry. Management covered this from different angles on the Q4 earnings call.

"The industry takes a fair bit of comfort in that in the sense that we're not relying on one particular trade or one particular engine for economic growth that it does seem fairly distributed globally. We don't hear a lot of specific concerns from our customer base or within the industry that somehow the steel tariffs are really going to - or the other types of tariffs are going to have a major impact on the outlook for this year or for the next couple of years."

"We would estimate that something in the range of 20% or so of vessel capacity is deployed into the U.S. trade so that if - if something does shrink the growth rate of U.S. imports, it's not great but it's not - an industry wide catastrophe."

Rising Interest Rates - Management has 86% of TRTN's debt fixed/hedged at a blended rate of 4.11%, over an average life of four years.

(Source: TRTN site)

Industry Tailwinds and Positive Factors:

Although leasing revenues contribute the lion's share of TRTN's earnings, its sales of used containers can also have an impact. Here's a look at how their used container sales trended in 2016 and 2017.

They went from losing -$20M in 2016, to gaining $35.8M in 2017, on used container sales:

(Source: TRTN 2017 10K)

Management commented in this positive development on the Q4 2017 earnings call.

"Tightness in the market obviously is very beneficial at the front end for the business, but the real benefits are in the - throughout the existing fleet in terms of extending leases at very attractive (prices). And of course the tightness has this knock-on effect on resale pricing with lack of supply coming in for sale of containers it's really helped to push pricing up. So that's a very, very key benefit we see."

TRTN also capitalized on its size in 2017:

"We estimate we captured nearly a 50% share of new container leasing transactions in 2017. The high expected returns and long average lease durations covering this large lock [ph] of containers will boost Triton's profitability for many years. And by demonstrating our unique ability to supply very large number of containers on short notice we have reinforced our position as the supplier of choice to the world's largest shipping lines."

Like many of the companies we cover in our articles, TRTN works on long-term contracts, albeit shorter ones than some of our picks. Their average remaining contract length was ~43 months, as of 12/31/17:

(Source: TRTN site)

Looking forward, management was upbeat about 2018 on the earnings call, seeing positive growth this year:

"Many of our customers are now forecasting growth in the 5% range, and prospects remain encouraging as we move deeper into 2018. We expect our adjusted pretax income will increase slightly from the fourth quarter of 2017 to the first quarter of 2018. Looking forward in 2018, we expect our adjusted pre-tax income and Adjusted net income will increase sequentially throughout the year if market conditions remain favorable.”

"The first quarter is usually our weakest quarter of the year since the represents the flow season for dry containers, and it has the fewest revenue days. However, container pickups and deal activity have remained solid in the first quarter."

The $.45 quarterly payout looks secure to us: TRTN's adjusted net income was $.85/share in Q4 2017, and management is expecting to earn a bit more than that in Q1 2018, its weakest quarter. With a quarterly payout of $.45/share, they had a 52.94% adjusted NI payout ratio in Q4 2017, which should improve a bit in Q1 2018 and improve further in 2018.

TRTN also will benefit from a lower tax rate and lower administration expenses in 2018:

"As a result of the new tax rates, we expect our effective tax rate to decrease to between 10% and 13% beginning in the first quarter of 2018."

"We expect administrative expenses for the first quarter and the full-year of 2018 to decrease by between 10% and 15% from the fourth quarter run rate as incentive compensation returns to target levels and we realize the full synergies of the merger." (Source: Q4 2017 earnings call)

Valuations:

We compared TRTN to its two US-traded competitors, CAI and TGH, neither of which pay dividends. (TGH eliminated its payouts in Q4 2016.)

TRTN has a higher price/book and price/sales valuation than CAI and TGH, but the thing that really struck us was the insanely low PEG ratios - (Price to earnings/growth) of all three companies. This tells us that this industry is very undervalued currently by the market.

With a PEG threshold of less than one signifying growth undervaluation, we'd say that .25X for TRTN should offer some decent upside.

Analysts' Price Targets:

Apparently, analysts agree - TRTN is currently 32% below analysts' lowest price target of $41.00, and over 50% below the average $46.80 price target.

Financials:

Here's the scary part of the story - debt. As you can imagine, financing thousands of containers costs a lot of money. All three companies have higher net debt/EBITDA leverage ratios than we've encountered in other capital-intensive industries, such as pipelines and shipping. TRTN, however, does have the lowest leverage of this trio.

Debt and Liquidity:

"As of December 31, 2017 and 2016, the company was in compliance with all financial covenants in accordance with the terms of its debt agreements."

(Source: TRTN 2017 10K)

TRTN's debt looks well laddered out into the future, but management will probably refinance its 2019 maturity. As the chart details, they have a strong EBITDA flow going.

TRTN seems to have ample access to capital. On 3/20/18, they announced that an "indirect wholly owned subsidiary, Triton Container Finance VI LLC, completed its offering of $429,300,000 Fixed Rate Asset-Backed Notes, Class A at an annual yield of 3.987% and $21,000,000 Fixed Rate Asset-Backed Notes, Class B at an annual yield of 4.837%."

"The Series 2018-1 Notes Class A, which are rated “A” by Standard & Poor’s, were issued with a coupon of 3.95% per annum and an annual yield of 3.987%. The Series 2018-1 Notes Class B, which are rated “BBB” by Standard & Poor’s, were issued with a coupon of 4.78% per annum and an annual yield of 4.837%. The Series 2018-1 Notes have a scheduled maturity date of March 20, 2028, and a legal final maturity date of March 20, 2043."

(Source: TRTN site)

Options:

If you're leery of tariffs and their potential impact on TRTN, but still want to have your toe in the water, there are attractive put-selling options available.

This out of the money, July $25.00 put strike had a bid of $1.20, as of 4/5/18, with an ask price of $1.40. It gives you a breakeven of $23.80, which is ~4% below TRTN's 52-week low.

Our Cash Secured Puts Table can give you more details on this trade and over 25 others. We update this puts table and our Covered Calls table throughout each trading day.

If you're a bit more bullish on TRTN, and you want to hedge your dividend income with some added option income, selling covered calls might fit the bill.

The July $35.00 call strike pays $1.85, and there's one $.45 quarterly dividend prior to the July expiration date.

Here are the three main profitable scenarios for this trade: Static, Assigned, and Assigned post ex-dividend date:

Our Covered Calls Table can give you more details on this and over 25 other covered call trades.

Summary:

We rate TRTN a buy, based upon its ultra-low PEG valuation, its dividend coverage, and its prospects for steady earnings in 2018. We're long TRTN, via being short out of the money put options.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

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Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.

Analyst’s Disclosure: I am/we are long TRTN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.