5 Companies You Can Treat Like Royalty
Aug 16th 2012 10:48AM
Updated Aug 16th 2012 1:14PM
OK, so not only do we have more baseball-inspired articles, but now I'm just being a homer and congratulating my hometown Seattle Mariners and Felix Hernandez pitching the 23rd perfect game in MLB history yesterday. King Felix continues to be one of the few bright spots on an otherwise dismal baseball team.
This perfect game got me thinking about stocks that might be bright spots in an otherwise weak growth environment. And King Felix's nickname made me think about royalty -- specifically, royalty income from patents and companies that depend on it for much or a portion of their revenue, and how those patents could drive growth and share price appreciation.
Below, in honor of King Felix's achievement, I'm going to walk you through five companies I feel you can treat like royalty and that could pay big rewards for shareholders.
InterDigital (NAS: IDCC)
InterDigital is probably one of the most well-known royalty revenue companies. Its portfolio consists of approximately 18,000 patents ranging from 2G and 3G to 4G LTE and 802.11 technologies. In June, InterDigital sold 1,700 of its 3G and 4G LTE wireless patents to Intel for $375 million. According to company estimates, it should be able to replace these 1,700 patents with new discoveries within 18 months. Based on the rough price of $221,000 per patent, InterDigital's patent portfolio alone could be worth around $4 billion if it were sold (compared to its current market cap of $1.4 billion). Although royalty revenue is only guaranteed if InterDigital's wireless solutions are utilized, the company managed to produce $302 million in royalty revenue in 2011 and appears to be destined for more patent sales in the future.
PDL BioPharma (NAS: PDLI)
Don't for one second think that royalty revenue is strictly limited to the technology sector. PDL BioPharma, known for its royalty interests in multiple high-profile drugs, has earned $203 million in royalty revenue through just the first six months of 2012. PDL receives royalty revenue from Herceptin, Lucentis, Avastin, Xolair, multiple sclerosis drug Tysabri, and also announced it stands to receive royalty revenue from the recently approved Perjeta. In the first quarter, Herceptin sales rose by 4%, while Lucentis and Tysabri both logged a double-digit gain, fueling PDL's steady royalty revenue growth. With many of the patents underlying these drugs protected through 2017 or later, PDL's royalty revenue stream appears to be well intact, and its diminutive forward P/E of four when coupled with its projected dividend yield of 8% make it an attractive source of consistent cash flow.
Chesapeake Granite Wash Trust (NYS: CHKR)
One segment that offers plenty of variety on the royalty interest front is the oil and gas sector, specifically royalty trusts. Although there are plenty of trusts that could easily be highlighted here, I prefer to note the trust Chesapeake Energy created last year, Chesapeake Granite Wash Trust. With royalty interests in wells located in the Granite Wash formation of the Anadarko Basin and no overhead costs since Chesapeake Energy does all the dirty work, shareholders can just sit back and collect the profits from the recovered natural gas, natural gas liquids, and oil. Unless production shuts down completely or natural gas prices go to zero, shareholders can count on fairly regular dividend payments. With a current yield of 11.7%, it's a smart way to play the energy sector.
Dolby Laboratories (NYS: DLB)
Looking toward the future, Dolby Laboratories' subsidiary, Via Licensing, looks like it's in the driver's seat when it comes to near-field communications royalties. You see, Via Licensing owns just about every patent related to NFC technology, which means that it's entitled to royalties every time a smartphone becomes NFC-capable. This could have wide implications, as NFC technology could push plastic credit cards into the sock drawer by 2025. In addition to its NFC patents, Via Licensing plans to launch an LTE patent pool by year's end that will include patents from as many as 20 companies, including AT&T. Dolby's subsidiary is definitely sitting in the sweet spot and should be able to capitalize on its patents in the coming years.
International Business Machines (NYS: IBM)
We'll end with yet another technology company. IBM isn't well-known for deriving much of its revenue from patents -- in fact, just $1 billion of its $106.9 billion in annual revenue last year came from licensing revenue -- but it still lays claim, after 19 years, to the top spot when it comes to total patents. Since 1911, IBM has been granted more than 70,000 patents, of which 34,000 are still active. No other company out there has as many patents as IBM, period! Without question, Microsoft's portfolio of software and gaming patents is more valuable than IBM's, but IBM is willing to spend about $6 billion each year adding to its patent trove with the hope of creating billions in additional recurring revenue.
We often forget about patents, licenses, and royalty interests when researching for great companies; let this be a reminder that the recurring revenue stream that these treasure troves can offer has the potential to make a big impact on a stock and its share price. These five companies are without a doubt worthy of being treated like "royalty" by shareholders, but there are still many more out there yet to be uncovered.
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The article 5 Companies You Can Treat Like Royalty originally appeared on Fool.com.Fool contributor Sean Williams has no material interest in any companies mentioned in this article. Feel free to treat him like royalty if you'd like. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Intel, Chesapeake Energy, IBM, and Microsoft. Motley Fool newsletter services have recommended buying shares of Intel, Dolby Laboratories, and Microsoft, as well as creating a synthetic long position in IBM and a synthetic covered call position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always the king!
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