Is Permian Basin Royalty Trust the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Permian Basin Royalty Trust (NYSE: PBT  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Permian Basin Royalty Trust.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(1.2%)

Fail

 

1-Year Revenue Growth > 12%

10.2%

Fail

Margins

Gross Margin > 35%

100%

Pass

 

Net Margin > 15%

98.3%

Pass

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

1.00

Fail

Opportunities

Return on Equity > 15%

6597.3%

Pass

Valuation

Normalized P/E < 20

23.13

Fail

Dividends

Current Yield > 2%

6.3%

Pass

 

5-Year Dividend Growth > 10%

(1.4%)

Fail

       
 

Total Score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With a score of 5, Permian Basin Royalty Trust makes it halfway to a gusher. For 30 years, the entity has held royalty interests in Texas oil fields and still has hundreds of oil and gas wells operating.

Although they're obviously tied to energy, investing in royalty trusts is different from investing in ordinary oil companies. Royalty trusts are tied to the production in particular areas, with BP Prudhoe Bay (NYSE: BPT  ) focusing on the North Slope of Alaska, San Juan Basin Royalty Trust (NYSE: SJT  ) concentrated in northwestern New Mexico, and Hugoton Royalty Trust (NYSE: HGT  ) largely targeting the Hugoton area of Texas, Oklahoma, and Kansas. As a result, even if energy prices skyrocket, royalty trusts won't necessarily follow suit unless the production from the particular properties the trusts own continues to stay stable or grow.

Despite its long history as an oil-producing region, the Permian Basin continues to draw interest. Late last year, Vanguard Natural Resources (NYSE: VNR  ) bought a 46% interest in Encore Energy Partners (NYSE: ENP  ) from Denbury Resources (NYSE: DNR  ) in order to expand its holdings into the Permian Basin, among other regions.

Permian Basin Royalty Trust is one of the few stocks paying dividends monthly. But because royalty income varies from month to month, so, too, do dividend payments for shareholders. Over time, though, the trust has produced strong income for long-term investors.

Since it's a royalty trust, it's hard to judge Permian Basin Royalty Trust's perfection based on these metrics. As an investment with a great dividend yield, the royalty trust will suit investors well as long as energy prices continue to stay high and as long as new technology can continue to coax production from these wells.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Click here to add Permian Basin Royalty Trust to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Denbury Resources. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 26, 2011, at 10:22 PM, busterbuddy wrote:

    I've found HGT and SBR to be good for me. Problem is I've had problems buying more because I keep thinking they are going to drop. And I've assume yield would go down. Neither has occurred.

    I bought SBR at 28 and at 66 my dividend yield at present value is too good to sell. I've started buying a little into HGT but limit prices are not getting hit.

    My mistake was not buying more at 28 had the money. But I stick my foot in lake to see if there are really no sharks.

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