Royalty Knockout #3

Royalty Pharma vs Dorchester Minerals

Royalty Pharma (RPRX) is the king of pharma royalties. The knock on RPRX for a knockout competition is its very success. At $33 billion in market capitalization, RPRX has grown into an industry behemoth. A great company for sure, but the phase-change gains are likely in the rear view mirror.

In the first quarter, leading royalties were the Vertex cystic fibrosis franchise $253 million, Trelegy $98M, Evrysdi $80M, Tremfya $64M, Tysabri $59M, Xtandi $51M, Voranigo $47M, Imbruvica $38M. Source: Royalty Pharma reports first quarter 2026 results

In that quarterly report, RPRX raised full year 2026 guidance with Portfolio Receipts expected to be $3,325 million to $3,450 million.

The PEG is reportedly 2, but the P/E ratio for current year is 12x based on the lowest estimate. Forward P/E is closer to 10x. Looks like a PEG ratio closer to 1.

The main concern here is the use of debt for financing royalty purchases. However, this is more an opportunity than a risk in the sense that higher interest rates are associated with faster economic growth and higher rates of inflation. An interest rate spike could create a buying opportunity. In sum, as a potential buyer looking at a fully-valued security, I’d like some of that risk to manifest to unlock a good entry.

RPRX hasn’t been a great performer since inception.

The long-term stochastic indicator is in the bullish overbought zone. Chart-wise, the first spot for buying would be in the $44 to $45 area as a test of the base. The 1.6 percent yield isn’t great at $57 per share. Recent dividend growth has been fairly weak around 5 to 7 percent. That’s not bad growth, but I’d much rather be picking this up around $30 per share.

To sum up RPRX, this is a high-quality stock near a full valuation, with that being a stronger statement in relative vs absolute terms. The stock is not overvalued, but the yield is unattractive.

Bottom line: this stock probably wouldn’t go deep in the Royalty Knockout unless it was depressed enough to make it a deep-value pick, but that’s for good reason. If there was a holding period constraint such as buy-and-hold for 20 years, RPRX looks better. The main risk from here is a repeat of 2023 with rising rates spooking investors. RPRX says its royalty portfolio has a duration of around 13 years.

Dorchester Minerals LP (DMLP)

Dorchester Minerals owns producing and non-producing oil and gas mineral, royalty, overriding royalty, net-profits, and leasehold interests across 594 counties in 28 states. DMLP does not use any debt. From their 10-K:

We do not have a credit facility in place, nor do we anticipate doing so. We do not anticipate incurring any debt, other than trade debt incurred in the ordinary course of our business. To the extent necessary to avoid unrelated business taxable income, our partnership agreement prohibits us from incurring indebtedness, excluding trade payables, in excess of $50,000 in the aggregate at any given time or which would constitute "acquisition indebtedness" (as defined in Section 514 of the Internal Revenue Code of 1986, as amended). We may finance any growth of our business through acquisitions of oil and natural gas properties by issuing additional limited partnership interests or with cash, subject to the limits described above and in our partnership agreement.

As the name implies, DMLP should be mineral heavy, but more than 80 percent of current revenue comes from oil alone.

The recent dividend annualizes to around a 7 percent yield.

DMLP with and without dividends. Depending on the start point, the past 20 years of returns are from the dividend alone.

The main knock on oil and gas royalties is the depletion rate. Mining can be uneven, but many mines have lives stretching at least 5 years. It’s not surprising for a mine to last 20 years or more, all the while producing somewhat consistent output with a ramp up and down at the beginning and end of the mine life. Oil and natural gas wells deplete almost immediately, with fracked wells depleting extremely quickly.

DMLP acquires new properties by issuing new shares. This is less risky than debt issuance, but debt has its uses. In a scenario similar to 2020 where asset prices and interest rates both collapse, using debt to buy new reserves would be superior to diluting at what would likely be a collapsed equity price.

Spit-balling based on millions of barrels they have royalties on, and stress testing for a knockout, a 4x in DMLP to around $100 per share would require WTI parking up around $170 per barrel if one assumes the stock retains a yield near 7 percent. That’s a big assumption given the wild world we might inhabit if WTI parks that high.

Best case short term would be an oil price spike that investors interpret as being permanent.

As we’ll get into with other companies, many of them have quote a bit of potential upside because they own a lot of mining royalties with a mix of producing, under construction and discoveries. If oil spikes, DMLP’s income and payouts will jump, but it will then be replacing reserves at higher prices. With some of the mining royalties, rising prices moves properties out of the “maybe someday” column into the real asset if construction begins and real cash once production is underway. They have phase change potential.

For this round however, DMLP gets a similar competitor in RPRX.

Knockout

The tie-breaking issue is whether the future will favor oil over pharma, layering on whether DMLP’s issuance strategy will beat RPRX’s debt strategy. DMLP has more risk if energy tanks, but crude oil is already near lows outside of recession. It’ll take a macro shock to knock prices further.

RPRX has risk if rates spike, triggering worries about the duration of the portfolio again.

Assuming there were no major red flags, a temporary plunge in oil or spike in interest rates would make either stock attractive on a plunge.

RPRX gets the edge because of diversification and long-term growth potential. DMLP is too much of a one-trick pony here, the caveat being if that one-trick pays off with an oil price boom.