Touting an “attractive” yield and calling it an “inflation hedge,” Raymond James analyst Michael Glen initiated coverage of Diversified Royalty Corp. (
) with an “outperform” recommendation on Thursday.
“DIV is a diversified business with a model geared towards acquiring revenue royalty streams from well-managed multi-location businesses and franchisors in North America,” he said. “The company’s current royalty partners include Sutton Group, Mr. Lube, AIR MILES Loyalty Inc., Mr. Mikes, Nurse Next Door, Oxford, Stratus, and BarBurrito. DIV believes that its royalty structure provides a strong incentive for a royalty partner to continue growing their business, while retaining control of the operation. Specifically, the structure allows an owner to monetize a portion of their business without giving up any equity control.
“On the surface, we understand that investors have been hesitant to embrace the royalty structure in a substantial way, bu ... a glance at some of the historical results of DIV provide insight into a model that ultimately achieves its intended objectives. Post transaction, DIV’s royalty partners have continued to grow and build their royalty payment streams to the company, which is then flowed to investors in the form of dividends. We recognize that the dividend growth has been at a modest pace (3-per-cent CAGR since 2015), but to the extent that the model can achieve wider adoption, this should help provide support for a more elevated model and be increasingly accretive.”
Pointing to an “attractive all-in-return including dividends approaching 30 per cent,” Mr. Glen set a target of $3.40 per share. The average is $4.13.