Investors have been dealt an exceptional hand since March 2009, with all three major U.S. indexes more than tripling in value since their lows. Considering that the stock market has historically returned about 7% annually, inclusive of dividend reinvestment, investors have been privy to some exceptional gains.
Of course, not every stock can move higher. This means investors always have to be on the lookout for great companies in any market environment. With the U.S. stock market knocking on the door of new all-time highs, the biggest concern for investors right now is that they don't want to overpay for future growth. Perhaps one of the best ways to avoid doing that is to consider investing like royalty.
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Royalty companies leverage the value of their intellectual property to generate revenue with very minimal overhead costs, making them an alluring investment opportunity in just about any market environment. What's more, royalty companies typically offer a dividend, which can help hedge against imminent stock market corrections. And maybe best of all, you can find royalty companies across multiple sectors of the stock market, meaning you can have a somewhat diversified portfolio of royalty stocks.
What royalty stocks are worth considering for investment? Here are three to get you started.
Ligand Pharmaceuticals
In the biotech industry, Ligand Pharmaceuticals (LGND 2.08%) is a royalty company to get on your radar. It has a small assortment of technologies that it licenses out to drug developers, but Captisol is probably its best known. Captisol helps with the stability and solubility of some developing and approved therapies.
According to a recent company presentation, Ligand has more than 90 different partners and more than 155 drugs currently in development that are utilizing the company's technology. By comparison, just nine developing drugs were using its technology back in 2008. The company also has 15 Food and Drug Administration-approved therapies generating a royalty at the moment, compared to just one in 2008. By 2020, Ligand foresees this figure nearly doubling to 28 approved products, which isn't a long shot considering that 25% of the 155+ drugs using its technology are either in phase 2, phase 3, or the new drug application review phase.
Overall, Ligand has been regularly earning between a 4% and 4.5% royalty on the net sales of approved products. Perhaps the best known is multiple myeloma Kyprolis, which could push toward blockbuster status in the years to come. Ultimately, Ligand's management expects the company to be generating a mid-90% gross margin by the end of the decade. And since people can't control when they get sick, or what ailment they have, the biotech industry tends to be recession-resistant. These are all potential reasons to consider buying into a royalty stock like Ligand Pharmaceuticals.
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Wheaton Precious Metals
You can also find royalty stocks among the precious-metal mining industry. Wheaton Precious Metals (NYSE: WPM) is a company that bypassed the traditional mining route and instead chose to work smarter, not harder.
Wheaton Precious Metals provides its partners with upfront cash so that they can expand an existing mine or develop a new mine. In return, it receives a long-term or life-of-mine contract for a substantial amount of gold or silver production at a cost that's usually well below market. Wheaton then sells what's produced and pockets the difference. In the company's first quarter, it wound up reporting average cash costs of just $4.54 an ounce for silver and $391 an ounce for gold , which equates to a nearly $11.50 an ounce margin for silver and $830 an ounce margin for gold, based on today's spot prices.
Like Ligand, Silver Wheaton has numerous partners, so its management team isn't constantly crossing its fingers and hoping for the best. With its annual revenue production pretty evenly split between gold and silver, and the company having multiple mines under contract, a strike or weather-related stoppage at any of its partnered mines isn't enough to tarnish its results. Plus, with dividends somewhat of a rarity among gold and silver mining stocks, Wheaton's precious-metal-dependent 1.4% yield is icing on the cake for investors.
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Qualcomm
Royalty stocks even exist in the technology sector. Though a company like Qualcomm (QCOM -0.55%) generates around two-thirds of its revenue from its chip-making business, the remaining third, comprised of its wireless technology patents, is responsible for nearly all of its profits. Last year, Qualcomm made $1.8 billion in pre-tax profit on $15.4 billion in chip sales, and $6.5 billion in pre-tax profit on just $7.6 billion in its royalty licensing division.
Qualcomm's ability to siphon royalties from smartphone developers using its wireless connectivity patents gives it a pretty steady stream of high-margin cash flow. As long as consumers continue to purchase new smartphones, or upgrade their existing smartphones, then Qualcomm's royalty model should be in great shape over the long run.
It is worth pointing out that Apple is in the midst of a billion-dollar lawsuit against Qualcomm over its intellectual property claims. Qualcomm has allegedly been tying its royalties to the cost of iPhone development, which has angered the tech giant. Additionally, Qualcomm could be facing lawsuits from U.S. regulators. The company very much relies on its high-margin royalty business for its success, so any modifications to its royalty pricing could be painful.
This royalty stock is exceptionally inexpensive if the case works out in Qualcomm's favor, but no one is exactly sure what'll happen given the expectation for a lengthy trial. Nevertheless, with a 4.1% dividend yield, Qualcomm is a royalty stock worth getting on your radar.
