Roy Thomas’ little enterprise brought in $34 million in 2011…
The thing is, Roy did nothing to bring this money in…
The toughest part of Roy’s job is probably coping with the boredom… He simply cashes royalty checks when they arrive, and he sells (unadvertised) land when the phone rings with an unsolicited buyer on the other end.
Specifically, Roy cashed $22 million in royalty checks in 2011… $12 million more arrived from land sales (that Roy didn’t pursue).[ad#Google Adsense 336×280-IA]To me, Roy is the steward of The Greatest Untold Story on Wall Street…
Roy presides over a tiny – but perpetual – royalty on 400,000-plus acres of oil and gas rights in Texas. And he presides over 940,000-plus acres of Texas real estate.
Roy’s job is to take the cash that comes in from royalties and land sales, and give it to shareholders, primarily through buying back shares. (He does this through the trust’s governing documents… which go back to 1888.)
As Brett Eversole explained in a recent DailyWealth essay, you can think of share buybacks as a “tax-free dividend.”
When a company buys back shares of its stock, your remaining shares become more valuable. It’s like cutting a pie into six slices instead of eight… The pie is the same size. But each of your slices is bigger – each share is worth more. And unlike a regular dividend, you don’t have to pay taxes on that increased value unless you sell your shares.
The power of share buybacks is incredible…
I recommended shares of Texas Pacific Land Trust (TPL) to my True Wealth subscribers in 2010. Shares are up 62% since I wrote about them. And TPL has bought back roughly 6% of its shares in that time.
The buyback is not discretionary – Roy must buy and retire shares with the income that comes in by charter. Remember… this buyback is essentially a massive “tax-free” dividend to shareholders. You’re getting a bigger percentage of the Texas Pacific pie each year… without getting taxed on it.
In addition, TPL will be paying a dividend in two weeks… So readers will have picked up an additional 1.5% in dividends since we bought (based on our entry price).
Texas Pacific Land Trust has really delivered for us – subscribers have earned capital gains, a bigger percentage of the pie through the buyback, and dividends.
What’s Texas Pacific worth today?
The stock market values it at $400 million. I value the $22.4 million royalties at eight times cash flow, giving Texas Pacific’s perpetual royalty a value of roughly $180 million. If that number is right, that means the stock market is valuing the land at roughly $220 million… or about $230 an acre.
The stock is around $43 as I write. I first recommended it around $27 and told my readers to sell half at $54 and let the rest ride until 2014 when we sell. That advice still stands…
At its current price of $43, I don’t think there’s enough upside potential here to make it worth BUYING with new money at these levels.
But those that bought when I first recommended it in True Wealth should keep holding it… It’s performed as we’d hoped… It’s been a compounding machine, and will continue to be, thanks to those share buybacks.
The numbers get ridiculously good.
If you’re interested why, I highly recommend you go back and read the DailyWealth I wrote explaining it here.
You can also read the full write-up from my True Wealth newsletter absolutely free here.
Share buybacks are incredibly powerful – particularly in our zero-percent interest world. Texas Pacific Land Trust is a great example of why. The Greatest Unknown Story on Wall Street won’t ever change. Even though I don’t recommend buying at these prices, I do recommend keeping an eye on it… and accumulating shares when it gets cheap.
Source: Daily Wealth