TORM plc (NASDAQ:TRMD) is a Danish shipping company, founded in 1889. So a company with a significant history! They focus exclusively on transporting refined oil products. They’ve a large fleet of around 80 vessels. But what distinguishes TORM from its competitors is its focus on dividends. TORM distributes a significant percentage of its income to shareholders every quarter. They have a clean balance sheet and are returning capital to shareholders now.
The below shows TRMD’s share price performance in 2023 so far. It started the year around $27/share and is currently trading at just over $25 per share.
If you include dividends paid this year so far, TRMD is marginally green in 2023 thus far. But it is trading considerably below recent highs of $36.60.
The market capitalisation for the company is $2.13 billion. It’s one of the largest listed tanker companies in the market.
They own 87 vessels, of which 62 are fitted with scrubbers.
Link to fleet: https://www.torm.com/about/fleet/default.aspx
They own 60 MR vessels, 14 LR1 and 13 LR2 vessels. The average age of the fleet is currently 12 years – but their oldest ship is 20 years old.
So 69% of their fleet are MRs, 16% LR1 and 15% LR2.
Recent Dividend History
TORM conveniently provides us with its recent history. Product rates were worse – and dividends lower – prior to the current healthy market.
What we can take from the above, though, is their current firm commitment to paying out a dividend. In the last 4 quarters, they have paid out $7.01 per share. On a stock trading for $25.24. That’s a yield of 28% on the current share price.
TORM released its Q2 earnings in mid-August. The slide below is a good summary of their earnings:
Their profit for the quarter was $184 million, giving an Earning Per Share (EPS) figure of $2.20. That’s $2.20 for a company trading at $25.24 per share today. In addition, they paid you $1.50 per share for Q2. That would give a dividend of $6/year…or a yield of 24%. But the question is, can that be sustained? Is the company operating in a tough market or is it taking on excessive risks? The answer to both questions is no.
TORM’s Balance Sheet
Let’s look at TORM’s balance sheet to see if they are in a position to afford the dividends they are paying out.
Total current assets are $677 million
Their total current liabilities are $385 million, and their total non-current liabilities are $909 million.
Total liabilities are $1,294 million, and their net liabilities are $617 million.
So clearly, they can cover their current liabilities. Also, note their Q2 2023 EBITDA was $237 million as well. I think it’s fair to say that – at current EBITDA levels, they could repay ALL their debt after 3 quarters alone.
It seems very logical to me that – assuming current market conditions – TORM’s balance sheet is in fine condition. The only remaining question is…will these rates persist.
Q3 and Current Market Rates
For Q2, TORM’s Time Charter Equivalent rate was $36k/day. In their Q2 earnings release, they also gave us the below:
“As of 14 August 2023, the coverage for the third quarter of 2023 was 74% at USD/day 30,534”.
If the quarter ends up at $30.5k/day, that’s a 16% drop in earnings from Q2. Q3 will certainly be worse than Q2.
Q2 revenue was $384 million, based on a TCE of $36k per day. Giving a profit of $184 million. A 16% drop in TCE will hit their Q3 revenue by $64 million and eventually bring their profits down to $120 million. Their $1.50 per share dividend costs the company $126.6 million per quarter. So in Q3, they could still – just – afford to keep a dividend level of $1.50 per share. So Q3 could see a dividend level of $1.50 again. And you should note, that Q4 should be stronger again.
TORM pays out excess cash above $1.8m per vessel. If they earn $120 million for the quarter, I expect them to pay out effectively all of this cash as a result.
How are rates in the market now? From Infinity brokers, dated early September 2023:
Scrubber fitted LR2s: $40k/day
Scrubber fitted LR1s: $49k/day
Scrubber fitted MRs: $28k/day
We know TORM’s fleet is 69% MR, 16% LR1 and 15% LR2. (Note: look at the triangulated numbers in the above image.)
So the weighted, scrubber fitted, fleet rate would be around $33k per day.
-> We can see that product rates have trended back upwards again. At $33k/day for a sustained period, earnings will trend back up toward Q2 levels. And dividends would remain $1.50/quarter, giving you a yield of 24%.
Medium-term picture: TORM also shows us how the overall market looks. In 2023 the fleet (supply) will grow by just 1%, and be just under 1% again in 2024. By contrast, demand for their ships increased by 7% due to the recent ban on Russian oil products. It looks as if the supply/demand picture for product tankers is very healthy indeed!
Longer term, the order book represents about 10% of the current fleet. However much of this will not be delivered for another 3 years. I don’t think we need to worry unduly about the 2026 supply/demand picture…just yet!
So from the above, it looks to me that:
– TORM is not damaging its balance sheet with its current approach; and
– Tanker rates are supportive of the 20%+ dividend rate that TORM is paying.
Risks to your return
There are risks to an investment in any individual company, and certainly, if you are investing in the tanker space. The primary risks that I see for TRMD include:
OPEC: OPEC could, of course, impact the global supply of oil if they so decide. In turn, this could impact on the rates TRMD can achieve for its ships.
Global recession: If there’s a reduction in demand for refined oil, demand will lessen for TRMD’s ships. And rates would fall in tandem.
Politics: if the EU rescinds its ban on Russian oil products, tanker rates will also fall. I don’t think this is likely, given the reasons as to why the ban is in place.
Management: TORM’s management could decide to stop paying out a dividend. And/or they could decide to reinvest in the fleet. But we know that – in recent history – they have paid out over $7/share in dividends. They appear very committed to continuing to reward shareholders.
Unfortunately, I don’t know the future. The markets where TORM operates could get worse, and the dividend yield could fall from here. There are definitely risks associated with investing in an individual tanker company.
However, I do know that the product-tanker market is tight and that profitable day rates are likely to persist. I know that TORM’s balance sheet is clean. And I know that they are paying out a very healthy dividend. If you like dividends, you like TORM. Strong Buy.