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They invest in companies and take a royalty. They have about 16 businesses. Some have not worked out. His issue with a royalty company is that he wants to know the detailed financials for all of their companies in the portfolio and he does not get them.
It is hard to judge if the dividend is sustainable. They had a pretty good track record up to a certain point. He prefers a direct operating company.
They take money borrowed at 5% and invest it at 15%. They have a number of companies that are doing very well. Wait for a quarter where the negative news starts to turn. The yield is fairly safe. They are paying their dividend out of earnings. Their cash flow is sufficient to sustain it.
He likes management. Pretty lean and very good at what they do. The trouble with a royalty business is that as they get bigger, they find it harder to grow; harder to find good opportunities to deploy their capital, and there is pressure on them to do that. Payout ratio seems reasonable. Thinks management is smart enough and talented enough to make you some money.
Some of their partners have run into financial problems, which he thinks are temporary. It has now become a “show me” story and they have to demonstrate to the market that they can manage the situation. Had pretty high expectations for capital deployment to new partners this year and so far they haven’t instituted a lot. We need to see them do more deals for investors to feel more comfortable. The dividend is fairly safe and the yield is good. This is a good buy, but you need to be prudent.
(A Top Pick Sept 21/15. Down 20.42%.)This has a good business model, good management, and a demonstrated record of producing results over time. He is puzzled as to why the stock has come off. Has owned this for 10 years and recently added to his holdings. 7.5% dividend yield and a 10% PE and an almost 10% free cash flow yield. Still a strong Buy.
In the royalty business, you typically need a reasonably high valuation to do your deals so that they are accretive. This company did a very good job of that for a number of years, but has stumbled in the last few quarters. Had a pretty big earnings miss recently which took the stock down. Has this as a small Short, based on price momentum. This is expensive, even at 14X EB to EBITDA. Poor price momentum and an earnings miss is usually a warning sign for him.
This has been a problem. They have a few of their investee companies that are not making current payments, but most of them are working out fairly well. Their big company is KMH which they are seeking to exit on. If that happens, that will be a good catalyst. He would be leaning towards picking up more at this level. 7% dividend yield.
He has looked at royalty corps all together to see if there was an investment opportunity. Has just never been comfortable with the business model. Although you are getting a nice dividend, you have to deal with the volatility.
(Market Call Minute) They buy other companies and collect royalties. He likes to look at underlying investments so does not invest in this one.
Had a tough time trying to figure out who they are actually stepping into a royalty situation with. They have about 14-15 royalties with 5 of them not paying right now. To him, this is a “wait and see”. Doesn’t think the dividend is at risk, but if 2 or 3 of these royalties were to blow up, then you might be in trouble. If you own, consider selling it.
