As a conservative income investor, I am not one to take chances by buying into a newly formed company at IPO. My usual stance is to invest in established blue chip companies that pay a stable and growing dividend. But with the HealthCare Royalty Trust, a unique opportunity has raised and I am keen to put in my application for the IPO deadline of 16 March.
The healthcare royalty trust is the the first of its kind to be floated in the UK. The trust aims to raise £200m+ which it will use to invest in patented drugs and thus collect a stable cash-flow from these drugs over the years. The fact that this investment trust is a royalty company has given me confidence in investing in it at IPO.
Royalty companies pay a lump sum for the rights to a product(asset) up front and in tern will get the benefit of future cash streams provided by that product (asset). In this case, the HealthCare trust will be belying the rights for various patented medication in the areas such as HIV, Infertility and Vaccinations.
Royalty Companies are great for a number of reasons:
- It gives great diversification – from an investors point of view, the HC Trust will be holding a portfolio of 10 diverse income producing assets from the biggest and best pharmaceutical companies including GSK and Pfizer. In essence, it is a broad, diversified portfolio compared to a typical biotech company that might rely on just one or two drugs like Gilled Sciences (GILD) for example.
- Transparency and Lower Risk – With royalty companies, there is more clarity and transparency as compared with biotech stocks. Royalty pipelines are typically pretty visible, particularly over a three- or four-year time frame. Once the initial lump-sum has been pumped in by the royalty company to buy a license, the company doesn’t have any further risk. The company is not involved in actually developing a new blockbuster drug but instead buys existing drugs where cash flows can be ascertained. This makes it lower risk as it does not have to rely on the research and development element.
- Cost Effectiveness – If there are any unexpected costs relating to the product, for example rising cost of production, it’s not the royalty companies production. The company who sold the licence has to deal with these rising costs.
- Stable and Predictable cash flows – Royalty company atypically have safe and predictable cash flows and this is exactly what I want to see in any investment I make. I want to be able to see the free cash flow a company makes as this makes calculating its intrinsic value all the more easier.
- Higher dividends – If you look at other industries where royalty companies operate, for example mining, the royalty companies typically pay a higher dividend than even the biggest players in those industries. Because of a royalty company having low overheads, a high portion of royalty income goes to paying dividends and financing future royalty streams.
As you can see from the above, Royalty companies are great as they have a superior business model. Just look at Franco-Nevada Corporation (FNV) which is a royalty company in the gold industry. Whilst many gold miners have dropped in price by upwards of 60% over the past 5 years, Franco Nevada has only gone from strength to strength and is UP by almost 100% This is astonishing considering gold has been in a bear market over this period!
Whilst the HealthCare Royalty trust has many things going for it, it does have a few downside risks. One of the major risks is that the patents the trust buy only last a few year (average 5 years) and thus it will be up to management to keep sourcing new and attractive royalty streams. This risk is somewhat mitigated by the fact that the trust is run by a very experienced team who have
At the start of the fund, once the IPO is complete, the trust will have 10 assets. You can have a look at exactly what the 10 assets are and there duration period in the prospectus. The trust has targeted royalties of £55 million a year from these 10 diverse assets. Management has also stated that dividend yield should be 6% a year. The first day of trading for the new shares should be 4 April 2016 and the publication of the amount of shares to be issued should be on 30 March 2016.
HealthCare Royalty Trust intends to pay dividends on a quarterly basis with dividends declared in May, August, November and February and paid within one month of being declared. The Company intends to declare its first interim dividend in August 2016 to be paid in September 2016.
From my personal point of view, this IPO looks really interesting and I will be taking part by investing £1000. This should give me a very chunky dividend income of £60 a year which should go very nicely with my other high yielding stocks such as Shell (RDSB) and BP. The combined value of dividends I should get from these three stocks is about £530 a year. Not bad of an investment of £6721. That is a dividend yield of 7.88% for these three stocks.
I will be using the dividends from these high yielders to buy into lower yielding higher growth stocks. I am fascinated by this risk management technique of dividend extraction. The high yielders provide me with a great base to my portfolio and the dividends provided by them will go into higher growth companies that will properly my portfolio in to the sky!
What are your thoughts on the HealthCare Royalty Trust IPO? Are you planning to buy any shares? Leave your comments below!