Investors seeking a safe haven amid this week’s stock market storm could do a lot worse than jump into Tufton Oceanic Assets, as the shipping fund prepares to exit its business and return its money.
The Guernsey-based dollar-based investment company owns a fleet of 22 used tankers and bulk carriers valued at $451 million (£355 million), which it leases to major shipping companies for around one to three years.
Income from charter rates covers well-covered quarterly dividends, which offer an attractive yield of 7.8% at the current share price of USD 1.28. Increases in the value of the vessels and regular vessel sales ensure capital growth.
Taking income and growth into account, the portfolio has delivered an underlying total return of 103% over the past five years. Unfortunately, the actual total return shareholders received was a less impressive 77.6%.
That’s because, like many “alternative” funds, Tufton Oceanic shares fell out of favor as income investors turned to 4-5 percent yielding government bonds as interest rates rose. From a high of $1.41 in October 2021, shares fell to a low of $0.98 in January. Despite a 33 percent recovery since that low, at today’s price they are nearly 17 percent below analysts’ current estimate for their net asset value (NAV) of $1.53, which is slightly below the company’s most recent reported NAV of $1.55 on June 30.
Yet that is precisely where the investment opportunity lies. Like GCP Asset Backed Income, which we recommended last week, Tufton Oceanic has announced that it will begin winding down its portfolio in 2028, selling its vessels and returning capital to shareholders over a period of potentially two years.
This process will automatically offset the current share price discount, and even with liquidation costs of around two percent, current shareholders should see a 15 percent increase in value in addition to all the capital gains generated by the fleet to date.
In theory, investors could see the discount disappear much more quickly. Tufton Oceanic is holding a continuation vote at its annual general meeting in October. It’s possible that shareholders could opt to liquidate the company at that time, which would cause an almost immediate increase in the share price to match the asset value released by the liquidation.
However, the pension funds and fund managers that hold the bulk of the shares are unlikely to push the fund to the scrap heap anytime soon. Investors have been impressed with the way the company’s board and fund manager Tufton Investment Management have run the fund, putting shareholder returns first as the stock’s value declined.
Shares have risen sharply this year because the company decided to raise its annual dividend target from 8.5 cents to 10 cents per share, with quarterly payments of 2.5 cents (or 1.9 pence for investors who choose sterling payments).
The company also announced that it would continue to buy back shares as long as they are undervalued and return excess capital if no suitable investment opportunities can be found.
The company is in the process of recovering $31.5 million (£24.5 million) from the sale of two ships to investors registered on its register on August 14 by forcibly buying up 20.3 million shares at their net asset value of $1.55.
This means, for example, that anyone who spends $12,600 (£9,917) to buy 10,000 shares over the next few days will receive $1,082 (£851.61) by the end of the month. This cashback offer is attractive in the short term, but we think it could do well over the next four years too.
Our confidence is based on the fact that the two components that caused this year’s price jump – a solid investment return while at the same time the price discount has almost halved – are still present.
Although concerns that America could slide into recession and uncertainty about U.S. and Japanese interest rates unsettled markets this week, this is likely just a summer storm that says more about investor nervousness than the state of the global economy on which shipping depends.
Tufton Oceanic is confident that charter rates will remain high due to a shortage of new vessels and environmental regulations limiting the speed of ships. Although markets remain volatile, the outlook for the fund is good.
Questor says: buy
Closing price 1.28 USD
Gavin Lumsden is editor of Citywire’s Investment Trust Insider website
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