To The Moon

$Torm PLC(TRMD)$

Today, I will look into this high dividend stock. Is the dividend as great as it seems, or could it be a trap? And should this be our next big investment?

There are three key reasons why TORM has caught my attention:

• It’s the largest portfolio position for Howard Marks.

• It offers an impressive dividend.

• Its stock is currently trading at a 52-week low.

TORM is a shipping company specializing in transporting refined oil products. It operates one of the largest fleets of product tankers globally, making it a vital player in energy logistics. Let’s dig deeper.

Imagine investing $1,000 in TORM back in February 2018, when it entered the U.S. stock market. That initial investment would have bought you 132 shares. Fast forward to today, and those shares would be worth approximately $2,467.

But this company doesn’t just grow in value—it also rewards shareholders with dividends. Since 2018, you would have received $1,164 in dividends. Combining the current share value and dividends, the total comes to $3,631, reflecting a gain of 263% since 2018—not a bad return!

Who Benefits?

Individual Insiders: Less than 0.1% of the company is owned by insiders, meaning management has minimal skin in the game. Recent transactions show only sales, not purchases.

Super Investors: Howard Marks is the standout here, with TORM making up 26% of his U.S. portfolio and his fund owning 41.7% of the entire company. However, Marks recently reduced his position by 8%, equivalent to about 3.5 million shares.

Fundamental Analysis

• Return on Invested Capital: Disappointing at 2.9% (10-year median), far below the desired 10%.

• Net Profit Margin: Strong at 22.1% (5-year average), compared to the sector median of 12%.

• Share Buybacks: Concerning. The company issued 87.6% more shares since 2015, significantly diluting long-term investors.

• Debt: Acceptable, as long-term debt could be paid off in under two years using current free cash flow.

Growth Metrics

• Revenue Growth: Weak, with a 10-year compound annual growth rate (CAGR) of 4.4%.

• Free Cash Flow Growth: Positive at 11.1% over the last decade.

• Earnings Per Share Growth: Strong at 15% since the company’s restructuring in 2015.

TORM may not be a growth stock, but its value lies in its dividends.

Dividend Analysis

• Dividend Yield: An incredible 31.3%, with shareholders earning $586 per share last year.

• Payout Ratio: Worrisome at 79.1%, exceeding the ideal range of 20–50%. This high payout ratio leaves little cash for growth and reinvestment.

TORM has a unique and intriguing dividend policy. The company is committed to distributing 100% of its free cash flow after debt repayments on a quarterly basis. This means they prioritize necessary investments and repayments, then distribute the remaining cash as dividends.

Dividend Growth

Unfortunately, dividend growth is unpredictable due to this policy. The actual dividend fluctuates each quarter, making it impossible to forecast consistent growth. Even with a strong dividend payout, an investment should only be considered if the price is right.

Valuation

TORM’s price-to-earnings (P/E) ratio is just 2.5—a strikingly low figure. Essentially, investors pay only $2.50 for every dollar the company earns. However, P/E ratios can sometimes be misleading, so we’ll calculate the intrinsic value using discounted cash flow (DCF) analysis.

To account for the cyclical nature of the industry, we’ll base our calculations on the five-year average free cash flow. Here are the scenarios:

• Low Scenario: Free cash flow declines by 5% annually for the first 5 years, then remains flat.

• Medium Scenario: No growth over the entire 10 years.

• High Scenario: Growth of 2% for the first 5 years, then 3% thereafter, aligning closely with the industry’s predicted growth rate of 3.5%.

These assumptions are intentionally conservative to avoid overestimating growth, which can lead to poor investment decisions.

Intrinsic Value Estimates

With these scenarios, the estimated intrinsic values are:

• Low Scenario: $19

• Medium Scenario: $25

• High Scenario: $31

Applying a 30% margin of safety, we get:

• Low Scenario: $13

• Medium Scenario: $17

• High Scenario: $21

The current price of around $18 suggests that TORM is fairly valued.

Market Sentiment

What do we know about TORM?

• Positives: It offers a substantial, albeit unpredictable, dividend and appears fairly valued.

• Challenges:Geopolitical tensions in the Middle East lead to vessel rerouting, increasing uncertainty and volatility.EU sanctions on oil trade with Russia are impacting trade routes and demand for shipping services.Significant share dilution has negatively affected long-term investors.Operating in a highly cyclical industry requires careful consideration of market risks.

Stock Ranking Analysis

Using our stock ranking tool, TORM ranks as the 28th cheapest company analyzed, which is promising.

Conclusion

TORM is not a "great company at a fair price," but rather a "fair company at a fair price." Investors might find it appealing if they’re betting on continued high dividend payouts, but there’s little else to make it stand out.

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