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There are three things that really caught my attention about TORM. First, it is the largest position in Howard Marks' portfolio. Secondly, it has incredible dividends . And third, its stock is currently at a 52-week low. So, today we'll go through our seven-step analysis process to find out why Marks has such high confidence in this company.
Are these dividends really as great as they seem, or is it a trap? And we'll also find out if we should make this our next big investment? TORM is a shipping company specializing in the transportation of refined petroleum products. It operates one of the world's largest fleets of food tankers, making it a critical player in global energy logistics.
This will be interesting. Let's do it again. Imagine you invested $1,000 in this company in February 2018 when it went public on the US stock market. This initial investment would allow you to purchase 132 shares. Fast forward to today, and those same shares would now be worth approximately $2,467. But this company is not only growing in value.
It also rewards shareholders with dividends. So, starting in 2018, you would receive $1,164 in dividends. If we add up the current value of the stock and the dividend, we get $3,631. And that's a 263% profit since 2018. I must say, this is quite a good income. So , let's see who benefits from this. Individual insiders are a minus.
Less than 0.1% of the company is owned by individual insiders. So, unfortunately, management does not risk its own capital. And do individual insiders buy shares? This is a minus. We've only seen a number of sales transactions recently . But super investors own this company. This is a plus, and with one super investor, and that is , of course, Howard Marks .
This is his largest position, accounting for 26% of his US portfolio. And his fund owns 41.7% of the entire company. Is he buying stocks now? This is a minus. He reduced his position by 8%, equivalent to approximately 3.5 million shares. So , let's try to find out what he sees in this company ? Return on invested capital.
This is a negative, with a median 10-year yield of 2.9% . And we want to see this figure higher than 10%, so this is very disappointing. And what do we know about net profitability? This is a plus, an average of 22.1% over 5 years. And the median for the sector is 12%. So, this shows a really strong position for this company.
Now let's look at share buybacks. This is a "minus". They have issued an additional 87.6% of their shares since 2015, when they went through a restructuring process. So, they are very significantly diluting the shares of long-term investors. And debt is a "plus." It takes less than 2 years to repay long-term debt from current free cash flow.
So, that's good , but unfortunately, the overall financial situation is a bit mixed. But that's only part of the story. We want our companies to be strong, but we also want to see them grow. Income growth is a "minus" from the 4.4% average annual growth rate over 10 years. We would like to see this figure higher than 10%, so this is not very good.
Free cash flow growth is a "plus" of 11.1% over the last 10 years. And here we would also like to see an indicator higher than 10%. And the growth in earnings per share is another “ plus” of 15% since the company's restructuring in 2015. Until then, we can't calculate it because they were unprofitable.
So, growth is not bad, but TORM is definitely not a growth stock. Its value lies mainly in dividends. The dividend yield is 31.3%, so shareholders received $5.86 per share last year. This is an incredible return. But how safe are these dividends? Well, let's look at the payout ratio. This is a "minus" from 79.1%, and we want to see a payout ratio somewhere between 20 and 50%.
This means that shareholders receive over 79% of profits in the form of dividends. This is a lot , and the disadvantage of this situation is that the company has little cash left for development. But in fact, TORM has a very interesting dividend policy. The company commits to distributing 100% of free cash flow after debt repayment on a quarterly basis.
So they take care of the investments and payments they have to make, and just give the rest away as dividends. What about dividend growth ? This is a "minus" because due to dividend policy, the real size of dividends is constantly changing. It rises and falls every quarter. So, we cannot realistically predict its growth.
And even if a company pays excellent dividends, we should only buy it at the right price. The price/ earnings ratio is only 2.5. This is madness. We actually only have to pay $2.50 for every dollar this company earns. But the P/E ratio can sometimes be misleading. So, let's calculate the intrinsic value of this company using discounted cash flow analysis.
We will use the 5-year average free cash flow because this is a cyclical industry and this way we will get a more realistic view of the company in the long term. So, in the pessimistic scenario, we expect a 5% decline over the first 5 years, followed by no growth. In the average scenario, there is no growth for all 10 years.
And in the optimistic scenario, 2% and then 3% growth. So, the pessimistic scenario shows a story in which we see a number of problems for TORM. The medium scenario assumes stagnation, and the high one is close to the projected growth of the industry, which is 3.5%. It seems like we're being pretty conservative with these assumptions, and that's exactly what we're aiming for.
Predicting huge growth and then saying, "Well, this company is cheap" is a very easy path to disaster. So, with these estimates, the intrinsic value in the pessimistic scenario is $ 19, in the average scenario it is $25, and in the optimistic scenario it is $31. But we should always apply a margin of safety to these prices.
I use 30%, and with this margin we get $13 in the pessimistic scenario, $17 in the average, and $21 in the high. And the current price is around $18. So TORM seems fairly valued right now . But before making any investment decisions , let's try to take a bird's-eye view of this company . So what do we know about TORM?
It has large dividends that could change at any moment, and it is fairly valued. On the other hand, we see a number of obstacles. Geopolitical tensions in the Middle East have led to changes in ship routes, which can create uncertainty and volatility. EU sanctions on oil trade between the EU and Russia also affect trade routes and demand for transportation services.
They also dilute the shares of long-term investors by issuing lots of new shares. And this is a very cyclical industry, so we have to take that into account and decide whether such a company is suitable for our investment strategy. Now let's open our Pro Stock Rating and see how TORM compares to other companies we've analyzed on this channel.
So, this is the 28th cheapest company in the ranking, and that's not bad. But when we look at the quality of the company, we may have some questions. The company's overall score is only 1.4. So, it is at the bottom of the ranking. When we open the review, we see that there is nothing bad about this company, but nothing exceptional either .
So it's not a great company at a fair price, but rather a mediocre company at a fair price. But you can also count on the huge dividends to continue. And then she starts to look much more attractive. Thanks for watching, see you in the next video.
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