Diversified Royalty Corp T.DIV

Reopened a position at 2.81

[BlueJay2020]

Ultimately, I think the Mr Lube franchise has a long way to run in terms of comp store sales and new locations, plus Air Miles could turn out to be a diamond in the rough now that BMO own it.

I think downside from here is limited, although I've kept tabs on this stock long enough to know that it's not close to being a market favourite and I honestly don't know what it has to do to get over $3 - other than wait for interest rates to decline.  I'm here for the divi, and I can see the divi increasing by a cent relatively soon with more to come.

[nedstar71]

The stock trades poorly and has for years.  The one thing that should normally benefit the share price, a new royalty deal, in this case ends up hurting it due to the way they have to finance it.  Barely accretive deals funded by diluting an already lackluster share price.  They should have changed the business model years ago, the market has never liked it.  You'd think

[nedstar71]

Or put another way, if in 2016 after selling Franworks and having purchased Sutton and Mr Lube the previous year, the company just sat back and did nothing until today, I surmise that the dividend today would be close to 50% higher and the share price would be  over $5.  Hindsight is 20/20 mind you, but it's been clear the business model hasn't been well received by the market

[JayBanks]

I agree with most of what we are discussing here... I think that the market trying to price this is flawed in many areas. It's not really an institutional stock because it's rather small at 500-550M market cap at its higher end value potential at the moment, the shareprice is sub $5, liquidity is decent but not great and it's pretty much a royalty on Private Equity. I don't

[BlueJay2020]

Good post.  This is one of the rare stocks where your valuation methodology is actually not a bad ballpark indicator.  What you've mentioned about torque is key - those deals where there's a fixed annual fee with a slight increment each year are nothing to get excited about, although they do provide a solid foundation to build sexier things on.   I am surprised the

[JayBanks]

  I have 3 ideas on why: #1 - Everyone is worried about a recessionary period and everything that goes along with it, it doesn't make much sence if there could be rocky roads ahead to send that money out at the current time and lose some safety. Some of the deals we have are not set rate deals, if there's a pullback on spending at say Mr. Lube, that distibutable income reduces

[nedstar71]

Keep in mind in the Stratus example there were almost 14% more shares that needed to be distributed to due to the bought deal relating to the transaction, plus some debt that isn't free etc, the transaction imo was close to a wash.  Which is what most of the transactions they do are at this point.  And that's if we gloss over the idea that getting into a janitorial service

[JayBanks]

  They did not fund the Stratus deal through the proceeds of the share offering... here is directly what they stated: The Purchase Price was funded with approximately C$47.0 million drawn from DIV’s existing undrawn acquisition facility, a C$15 million increase in the senior credit facilities of DIV’s subsidiary ML Royalties Limited Partnership, and a new US$15 million senior credit

[nedstar71]

You really like to overcomplicate things.  The bought deal was announced the same day of the Stratus acquisition,  and was indeed used to repay the acquisition credit facility you quoted.  It's right in the release about the closing of the increased bought deal, a week after the Status acquistion closed.  The bought deal shares and debt funded the Status acquisition, the

[nedstar71]

And further to that, obviously the acquisition facility's interest rate is not favourable in this climate anyway so really can't be considered "dry powder" nor can other debt instruments.  Paying 8 or 9% for a 10% return is pointless.  Hence why the entire business model really doesn't work when the share price weak.  And new deals inherently make the share

[dogatcat]

You are being unecessarily negative.   The business model does work and has been working for years.   The royalty model has been around for years and provides a steady stream of income for many dividend seekers.  It is simply just very hard to put a value to in terms of share price.   Obviously, any dividend stock drops in value when interest rates are higher.

[nedstar71]

"DIV will move toward what I condsider to be fairly valued at around $3.50-$3.75.  A nice capital gain with a great dividend component" Again though based on what?  This stock hasn't seen $3.75 in the ten years it's been DIV, during plenty of low interest rate periods.  If anything has been driven into one's head over those ten years it has been sell it all at

[dogatcat]

In the last ten years, none of these new crop of investors have ever seen a higher interest rate environment.  It has been cut, cut and zero for most of their time in the market.  That, in my mind, will be the difference.   I think they have seen some of these tech stocks get hammered and they will come back to some safer, more stable money.   I still think that the

[BlueJay2020]

I really don't think tech stock investors would ever flock to DIV as a serious alternative.

[dogatcat]

Maybe, maybe not.   As people age, their investment goals change.   When talking about investing in a specific stock, you could argue, why are you paying 25X earnings for any stock?  What could possibly justify that valuation?   Investing in DIV comes down to price, yield, interest rates, age, and philosophy.   Not unlike any investment in your

[flamingogold]

Can you describe what sort of Aeroplan deal you are looking for?

[JayBanks]

  I did miss that note, you are correct, they have a current drawn amount on the acquisition facility from the Mr. Lube deal earlier this year, I thought it was the remaining amount used in the Stratus deal when I was quickly scanning for the info about the rates of everything I seen before... But with the Mr. Lube drawing, they are using that facility you don't recognize as Dry