Diversified Royalty Corp (TSX: DIV) is a multi-royalty corporation, engaged in the business of acquiring royalties from well-managed multi-location businesses and franchisors in North America (Royalty Partners). The company believes that its royalty structure provides a strong incentive for a Royalty Partner to continue growing the business while retaining control of the business. The company’s primary objectives are to purchase stable and growing royalty streams from Royalty Partners and increase distributable cash per share by making accretive royalty purchases. These objectives are intended to allow the company to pay a dividend to shareholders while increasing the dividend as distributable cash per share allows.

Investment Rationale

• A High Yielding Consistent Dividend Payer: DIV shares are offering a significantly higher dividend yield of 8.03%, which is quite high, considering the current lower interest rate environment. The company’s dividend yield is approximately 2.45 times of the TSX Composite Median dividend yield of 3.3%. Moreover, the company has a consistent track record of dividend payment over the past five years and recently the board of directors approved an interim dividend of CAD 0.0167 on January 5, 2021, which was payable on January 2021. More importantly, it is usually hard to find a consistently dividend-paying stock with proven track records within the penny-cap arena. Therefore, DIV is well-positioned to serve income investors as well.

Dividend History. Source: Refinitiv (Thomson Reuters)

• Bullish Technical Indicator: At the last closing, DIV shares traded above the crucial short-term as well as long-term support levels of 50-day and 200-day Simple Moving Average (SMAs), which typically considered as a bullish price trend in the security. Further, Price/200-day SMA ratio stood at 1.27x, implies that the stock is trading approximately 27% away from the 200-day SMA, which also indicates that the trend is strong. Also, its shares traded above the crucial short-term 21-day EMA line as well, which is another bullish indicator. Also, the Moving Average Convergence Divergence (MACD) is rising and hovering above 9-day SMA signal line, with the difference between 12-day and 26-day EMA is positive, another bullish indicator.

Technical Price Chart. Source: Refinitiv (Thomson Reuters)

• Volume Spurt: A volume spurt was spotted on the daily price chart, with 5-day average traded volume in DIV counter was approximately 16.5% higher against the 30-day average traded volume in the stock and approximately 9% above the 90-day average volume in the stock and prices have moved up approximately 1.2% in the past five trading sessions, which implies longs are building up in the DIV shares.

• Hedge Funds are Holding 8.47% Stake: Polar Asset Management Partners Inc, a Toronto, Canada-based Hedge fund holds approximately 10.24 million shares or 8.47% stake in the company valuing CAD 13.81 million at the last closing. Hedge Funds are usually believing in creating short-term higher gains from their investment and presence of Hedge Fud with such a large position in a penny-cap stock indicates that they are quite bullish on the future performance of the company.

• Improved Royalty Income on Q-o-Q Basis: In the third quarter of FY20, the company revenue improved by 28% against the quarter over period, led by approximately 27.6% improvement in Royalty income and 10% increase in the Management fees. Revenue increased in the third quarter due to the incremental adjusted revenues related to the Nurse Next Door transaction that closed in November 2019 and the acquisition of the Oxford Rights in February 2020, partially offset by the impact of the COVID-19 pandemic, which included royalty and management fee waivers for Mr. Mikes and lower royalty income from the AIR MILES® Licenses.

• Risk Associate to Investment: A next wave of COVID-19 and government restrictions may affect the business of the group’s royalty partners, and thereby the group’s performance. Also, the company is exposed to Credit risk, which is associated with the Company’s, royalties, and management fees receivable, amounts receivable and investment in NND Royalties LP. Further, the company is exposed to volatility in the interest rate as the Company has long-term bank loans that are subject to floating interest rates.

Financial Highlights: Q3FY20

Source: Company Filing

• Revenue for the three months ended September 30, 2020 was CAD 8.0 million compared to CAD 8.1 million in the prior year. After taking into account the DIV Royalty Entitlement related to Nurse Next Door, adjusted revenue was CAD 9.2 million for the three months ended September 30, 2020 and CAD 8.1 million in the prior year.
• Royalty Income grew by ~28% to CAD 7.91 million in the third quarter of 2020 on a sequential quarter basis.
• Adjusted revenue increased in the third quarter due to the incremental adjusted revenues related to the Nurse Next Door transaction that closed in November 2019 and the acquisition of the Oxford Rights in February 2020, partially offset by the impact of the COVID-19 pandemic, which included royalty and management fee waivers for Mr. Mikes and lower royalty income from the AIR MILES® Licenses.
• For the three months ended September 30, 2020, distributable cash increased to CAD 6.3 million compared to CAD 5.4 million in the prior period. The increase in distributable cash was primarily due to higher adjusted revenue and lower current tax expense, partially offset by lower interest income and higher interest expense.
• For the three months ended September 30, 2020, the payout ratio was 96.0%, a decrease when compared to the payout ratio for the three months ended September 30, 2019 of 111.1%. The decrease was primarily due to higher distributable cash in the current period and a lower amount of dividends declared, partially offset by a higher weighted average number of common shares outstanding.
• For the three months ended September 30, 2020, the Company declared dividends in the aggregate amount of CAD 6.0 million (CAD 0.0500 per share), compared to CAD 6.1 million (CAD 0.0556) per share) for the three months ended September 30, 2019. The decrease in the total amount of dividends declared was due to the decrease in the monthly dividend rate, partially offset by a higher weighted average number of common shares outstanding.

Stock Performance

Over the last 1-Year, shares of DIV registered a 52W High of CAD 3.41 (11 Feb 2020), and registered a 52W Low of CAD 1.2 (23 March 2020). And at the last closing price of CAD 2.49, its shares traded approximately 108% above the 52W bottom and approximately 27% below the 52W High level, implies a strong rally in the since March 2020 and now mostly tilted towards the 52W High as well. In a year-over period, shares of DIV featuring a negative price return of 21%, but quoting a positive price return of 30% in 9-Month, 31% in 6-Month, 42% in 3-Month and 9% in 1-Month, respectively.

Top-10 Shareholders

Top-10 shareholders in Diversified Royalty Corp together hold approximately 25.73% stake in the company, with Polar Asset Management Partners Inc, Maxam Capital Corp. and PenderFund Capital Management, Ltd are the top three major shareholders with an outstanding position of 8.47%, 5.42% and 4.25%, respectively.

Source: Refinitiv (Thomson Reuters) 

Valuation Methodology (Illustrative): Price to Book Value based Valuation Metric

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Peer Comparison

Source: Refinitiv (Thomson Reuters) 

Stock Recommendation

In the third quarter of 2020, the company’s Royalty Partners started experiencing encouraging trends in their businesses as various governments eased certain restrictions put in place to fight the COVID-19 pandemic. Overall, DIV’s Royalty Partners contributed to higher royalty income in the third quarter of 2020 compared to the second quarter of 2020.

Also, DIV shares are offering a significantly higher dividend yield of 8.03% with a consistent track record of dividend payment over the past 5-year. This could be a single strong measure to enter into DIV shares, as improving market condition will support stock price lead to capital gain and at the same time, the stock is offering a decent income-earning opportunity as well.

The stock is hovering in a bullish price zone as it closed above the technical support levels. Moreover, a strong position held by Hegde Fund is also bolstering confidence for a potential short-term gain from the investment.

Therefore, based on the above rationale, risk associate and valuation, we have given a “Speculative Buy” recommendation at the closing price of CAD 2.49 on January 26, 2021.

Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at January 27, 2021 price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.