# Diversified Royalty Corp. (DIV.TO)



## tkirk62 (Jul 1, 2015)

Hey I just wanted to look on the forums for some second opinions on this stock and didn't see any other threads for it.

At the last closing price the yield is 6.78% and the payout ratio has moved under 100% after their second royalty acquisition. Annual royalties received with the two current royalties should be about $16.1 million or $0.228/share with prospects for growth of the current royalties. This covers the $0.20 annual dividend. 

Total liabilities after the acquisition I believe is around $24 million while cash on hand is $10 million.

The royalties they have are for Franworks restaurants (Original Joe's, State & Main and Elephant & Castle) out west and Sutton Realtors which has operations across the country.

Looking at it I like the way they are being run and I think the CEO has been involved with the royalty structure with other companies before.

This presentation has info on the new acquisition and I think kind of shows their process: https://diversifiedroyalty.files.wordpress.com/2015/01/div-investor-call-2015-06-10.pdf

I know that the royalty stocks have been very friendly to their shareholders (A&W, Pizza Pizza, Boston Pizza, etc) and this looks like it could be a chance to get in early on another and go along for the ride.

Thoughts?


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## CPA Candidate (Dec 15, 2013)

I bought a few shares of this company back in the winter and did not even know they had acquired another royalty stream. The Sutton income stream seems sound, but opportunities for growth appear slim.


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## tkirk62 (Jul 1, 2015)

Both of the royalty deals have the ability to grow. Diversified can purchase royalties from more Franworks restaurants each year (this year they purchased five more and eliminated one I think), and the Sutton deal grows at 2% per year with the ability to purchase royalties from more realtors as well. 

I agree that there doesn't appear to be many avenues for growth, but the Sutton deal came out of the blue months after their financing. I expect them to raise cash in the next few months and probably sit on it for a long time again. I have trusty in the management team though.


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## tkirk62 (Jul 1, 2015)

This just got another royalty stream (Mr. Lube, approximately $12 million a year), completed their financing so the price should drop in the near term to close to the offering's price ($2.70). But they now are more diversified, have committed to increasing the dividend again,which makes twice this year to an already high yield, and management seems excellent.

I hate to seem like a pumper, but this stock has been great for me, and the recent weakness due to the financing offers a good price to discover this stock on their own. It's like a chance to get into the very early stages of another Alaris Royalty.


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## gibor365 (Apr 1, 2011)

I hold small position, planning to add more on dip


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## jaybee (Nov 28, 2014)

I also hold a small position. 

Management seems very competent, which is very important imo, since you can't see the balance sheets of the companies that they do deals with.

Having said that I don't get quite the boner that OP gets from this one. I'm taking a wait and see approach, and collecting the dividends in the meantime!


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## doctrine (Sep 30, 2011)

They seem active in making deals. You can basically get in now at the same price that they made their first deal, and now they have three. I think some of the businesses are going to have stagnant sales, given they're in Canada and economic growth is slowing, but it could be good to add over the next year as this stock is undervalued compared to other royalty streaming companies. Near the top of my watch list.


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## tkirk62 (Jul 1, 2015)

No boner (well maybe a little), just didn't see any discussions on it. That being said, I do think the dividend and the long term potential of this is a good opportunity in the early stages of the story. And in this market I feel safer with it than a lot of things.


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## jaybee (Nov 28, 2014)

tkirk62 said:


> No boner (well maybe a little), just didn't see any discussions on it. That being said, I do think the dividend and the long term potential of this is a good opportunity in the early stages of the story. And in this market I feel safer with it than a lot of things.


LOL. I jest.

I think it's a nice pick.


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## HaroldCrump (Jun 10, 2009)

Alaris Royalty is larger and more diversified.
Another upcoming name in this field is Grenville, which is closer in market cap to DIV


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## jaybee (Nov 28, 2014)

Grenville looks interesting. They focus on partnering with SME's more so than DIV, and AD. It requires a quicker pay back to compensate for increased risk. I'm watching it closely.


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## jaybee (Nov 28, 2014)

HaroldCrump said:


> Alaris Royalty is larger and more diversified.
> Another upcoming name in this field is Grenville, which is closer in market cap to DIV


I've done well on Alaris. The wife owns DIV, and this afternoon I dipped my toe in the water with 10,000 shares of Grenville. I just like the royalty business model.


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## tygrus (Mar 13, 2012)

This thing is only yielding 3%...yawn


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## jaybee (Nov 28, 2014)

tygrus said:


> This thing is only yielding 3%...yawn


What is?

Div = 6.95%
Alaris = 5.43%
Grenville =6.09%


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## tygrus (Mar 13, 2012)

jaybee said:


> What is?
> 
> Div = 6.95%
> Alaris = 5.43%
> Grenville =6.09%


Ahh, my apologies. Looks like I had the wrong exchange.


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## jaybee (Nov 28, 2014)

The thing I like about the model is that the royalties come off the top line. Top line revenues are generally more stable than the bottom line. The partners are happy because they get the capital without having to give up control. The shareholders are happy because they get the high yields! Win/Win/Win.


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## tkirk62 (Jul 1, 2015)

Grenville is interesting, especially now that it has dropped to the low .80's. But because these royalty companies are focusing on such different things, they can hardly be compared beside their business model. 

DIV focuses on franchises and multilocation businesses. They only have a few royalties at this point but are diversifying and growing quickly. I like the companies and deals they have worked so far. 

Grenville has something like 30 royalty streams. They announce new deals all the time. They structure their deals so they are paid back in 4 years, so the return on capital is 25%. This is far more than any other royalty company. The deals are each much smaller, in riskier companies. But only one so far has been a fraud, so management seems competent and understand what they are doing. It is riskier than DIV, and right now the yield doesn't reflect that. They have said they should be increasing the dividend with every four or so deals from this point forward. The capital gains potential of this one is higher, and I myself have been successful trading it in the past. This has been compared to owning a venture capital fund in that it is exposed to so many of that sized companies. If that is interesting to you then GRC is the place to look.

They are focused on different things, and I personally believe that DIV is the better company with a better current yield, but there could be a place for both in a portfolio. They are not redundant by any means.


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## jaybee (Nov 28, 2014)

DIV increases dividend by 6.2 percent. It's always nice to get a raise!

http://www.marketwired.com/press-re...vidend-set-to-increase-62-tsx-div-2046502.htm


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## tkirk62 (Jul 1, 2015)

And the stock price already jumped up a lot from the financing price. There is probably room for it to run though


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## CPA Candidate (Dec 15, 2013)

With respect to DIV vs. Grenville, I like that DIV has known brands that are in business lines that aren't speculative and that have some track record of success. Investing in Grenville feels more like a black box. On the downside DIV has the legacy CEO lawsuit issues to deal with that suck time and money away. I hold a small position in DIV.


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## gibor365 (Apr 1, 2011)

Planning to "average up" of DIV, they just got new deal and increased dividends and have pretty good fundamentals


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## lostwords (Feb 21, 2014)

GRC got hit pretty hard today


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## CPA Candidate (Dec 15, 2013)

lostwords said:


> GRC got hit pretty hard today


Indeed, wrote off one of their investments in full. See black box comments above. Their is virtually no way for an investor to know anything about the companies they are putting money into because they are so small.


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## tkirk62 (Jul 1, 2015)

GRC is investing in such tiny companies, then hoping they can pay back one quarter of the money they received each year. I just never saw how you could give a company money to help them grow and whatnot, then expect 25% back within a year. 

DIV pay back periods are 8-10 years. Much more reasonable, and along with the much higher quality of companies it makes DIV the clear winner in my books.


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## doctrine (Sep 30, 2011)

Now have a position in DIV @ $2.67. Dividend is now up another 10% with the closing of the Mr. Lube royalty, 8.2% yield. Really like it here; another $100M acquisition will probably result in another 5-10% dividend increase and a lower payout ratio.


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## gibor365 (Apr 1, 2011)

doctrine said:


> Now have a position in DIV @ $2.67. Dividend is now up another 10% with the closing of the Mr. Lube royalty, 8.2% yield. Really like it here; another $100M acquisition will probably result in another 5-10% dividend increase and a lower payout ratio.


I initiated position back in Jan at $2.69 . Like dividend growth, 2nd increase in 4 months


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## liquidfinance (Jan 28, 2011)

Dipped my toes into this one. A simple cash machine.


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## londoncalling (Sep 17, 2011)

I also jumped in today @ $2.68... Hoping for a lot of years of dividend growth and divvies.


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## tkirk62 (Jul 1, 2015)

For anybody who hasn't been watching this lately, DIV has been on a climb the past month or so. This is due to the resolution of a lawsuit against the former CEO back when the company was in a completely different business. 

The lawsuit ending cleared up a lot of uncertainty around the stock, and they announce earnings after close tomorrow. While they have some restaurants in Alberta, which has caused pessimism, the other businesses they are in should make the earnings number very respectable. 

I hate to seem like a pumper but I think that anybody who has considered DIV in the past should look into it today. People can ridicule me if I'm wrong but I think this one goes a lot higher Wednesday after earnings.


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## My Own Advisor (Sep 24, 2012)

Will look at it. Interesting. I love cash flow.


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## LongShorts (Feb 18, 2016)

Got in at $2.25 about 3 weeks ago. Bright future for this little gem....hopefully.


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## JC66 (Apr 6, 2011)

Not only the end of the lawsuit but it will be the first time to see how much exactly Mr. Lube brings to the table. Lets not forget it was the biggest cash layout (138 mill) of the 3 royalties. Also, it will be interesting to see the number of Franworks restaurants and their sales.


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## londoncalling (Sep 17, 2011)

doubled my position @ 2.24 earlier this month and now have an ACB of 2.46. Expecting a pop on earnings. If it disappoints I may add one more time. If it heads higher I will continue to hold. JC makes some good points about the next report. Should be an important one for the company.

Cheers


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## CPA Candidate (Dec 15, 2013)

The Franworks restaurant business will probably be weak, but that's no reason to abandon the story. The recession will pass in Alberta and life will go on. As they add more income streams, Franworks will matter less and less. The stock isn't that far away from being able to be used to perform more acquisitions.


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## Hippie (Mar 2, 2016)

Where is the ER that was supposed to be released yesterday?


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## tkirk62 (Jul 1, 2015)

Good question. They have until March 30th to file, I saw it listed on TMX that they planned to release Tuesday night, but didn't see anything from the company that said they would release earnings then. So to answer, I guess I don't know when earnings are coming out.


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## LongShorts (Feb 18, 2016)

I have a feeling they're going to wait until after the long weekend to release the ER.....


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## Hippie (Mar 2, 2016)

LongShorts said:


> I have a feeling they're going to wait until after the long weekend to release the ER.....


ya don't say...


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## LongShorts (Feb 18, 2016)

They finally released. it. EPS down 0.002/share in Q4. Really good total revenue numbers last year considering how 2015 went. Balance sheets look good. Expecting this to be a good one to hold for majority of 2016.


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## CPA Candidate (Dec 15, 2013)

The report came in as expected (to me at least). Alberta's economic influence was, as I expected, a bit over done by the market. DIVs overall exposure to Alberta is about 30%. SSG of Franworks was -1.9% in Q4. While restaurant business was down more in Canada (-3.7%), US denominated sales translated into CDN dollars mitigated the impact by 1.8%. The falling CDN dollars acts as a natural hedge to weakness in Alberta.

Because Sutton is now less than 20% of DIVs income, they won't be filing financial statements any longer.


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## My Own Advisor (Sep 24, 2012)

I assume most are holding in a TFSA or RRSP? Looks like dividends are eligible though...
https://diversifiedroyaltycorp.com/dividend-info/

Tempted to buy some now it's dropped to $2.20-ish closer to 52-week low. Then again, maybe I should buy more banks or POT.


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## doctrine (Sep 30, 2011)

I'm out of this, the payout ratio is too high for me combined with the negative sales of the restaurant royalty. The situation didn't improve last quarter.


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## CPA Candidate (Dec 15, 2013)

doctrine said:


> I'm out of this, the payout ratio is too high for me combined with the negative sales of the restaurant royalty. The situation didn't improve last quarter.


The stated goal of the company is to pay out 100% of cash. What do they need to accumulate cash for? There are no operations. They issue equity when they want to acquire another stream.


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## doctrine (Sep 30, 2011)

I really wish they had more clean quarters, analyzing it isn't easy. I believe their 99.5% payout ratio is still not counting income taxes, but they have 3 or 4 years worth of liabilities to run through. I'd rather see the payout ratio at 80% of adjusted EBITDA, not 91%, but they might get there in 3-4 years. I believe that anyone buying in now has the benefit of all the equity that was issued at higher prices that they can now effectively borrow against to offset these more temporary issues. Probably a really, really good in the $2.00-$2.15 range, where there is a lot of support, i.e. high volume supporting the price.

For example, looking at Q4 2015 vs Q4 2014, they went from $137M of book value to $241M in book value, with a $115M equity issue in between. They paid $17M in dividends, and lost $11M in book value. So overall value per share has dropped, but not too dramatically (most of the delta is the legal costs). If SSSG picks up, it could be good long term, but I always hate to lose book value per share year over year. I think this summarizes why I sold, but I reserve the right to change my mind


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## gibor365 (Apr 1, 2011)

> really good in the $2.00-$2.15 range


 I definitely gonna add more DIV if it goes down to this range


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## getliquid (Mar 2, 2014)

My Own Advisor said:


> I assume most are holding in a TFSA or RRSP? Looks like dividends are eligible though...
> https://diversifiedroyaltycorp.com/dividend-info/
> 
> Tempted to buy some now it's dropped to $2.20-ish closer to 52-week low. Then again, maybe I should buy more banks or POT.


where are the 2015 tax slips? I assume all distribution are eligible dividends? 
this would be a good consolidation to owning individual royalties funds correct?
since its distributing 100% of income, does it mean they only earn the management fee?


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## pacman (Sep 6, 2009)

Took a big jump yesterday. No news. Any ideas why? I had a sell order in at $2.30, and it blew through that, so now looking to get back in.


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## getliquid (Mar 2, 2014)

it says on their webpage it offers 3% on DRIP, however, I'm not getting the discount with my brokerage, is it brokerage specific, or do we have to individually register the certificates with the company?

Also how do we find out about fractional DRIPs? is it eligible per brokerage or per stock?


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## CPA Candidate (Dec 15, 2013)

The company has finally put John Bennett behind them and the stock is moving up on large volume. My guess is a lot of the shorts are scrambling to get out of a 9% negative yield that is moving up. As of August 16, I see 1.83 million shares sold short. I'll be very interested in the next figure.

Last quarter SSSG from Mr.Lube was 5%, offsetting the 5% decline in Franworks. Franworks will continue to languish until Alberta recovers, which is just a matter of time. I suspect a year from now the Alberta recovery will have some momentum. I'd be more concerned if the decrease in Franworks was the result of something specific to the franchise, rather than just an entirely weak economy. 

As far as the distributable cash payout ratio, it doesn't include taxes because the company doesn't pay cash taxes, it merely draws down it's deferred tax asset. This asset exists because of the recognition of past non-capital losses. I expect the asset to be fully used in about 6-7 quarters. That is substantial time for Alberta to mend.


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## CPA Candidate (Dec 15, 2013)

Well, Franworks doesn't even matter anymore, it has been sold to Cara and the intellectual property is being repurchased from DIV for what they paid for it.

https://diversifiedroyaltycorp.com/investors/news/2016-09-01/

Interestingly, the stock is down on the news. So in summary, the market was worried about Franworks because of it's Alberta exposure and sent DIV's share price down over the past 12 months or so. And then, when the rights were sold for no loss and the Alberta overhang mostly removed, the stock went down. What don't you understand about the stock market?


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## gibor365 (Apr 1, 2011)

> when the rights were sold for no loss and the Alberta overhang mostly removed, the stock went down. What don't you understand about the stock market?


 they should make a smart purchase with proceeds from FW sale, than stock should rebound


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## doctrine (Sep 30, 2011)

CPA Candidate said:


> Well, Franworks doesn't even matter anymore, it has been sold to Cara and the intellectual property is being repurchased from DIV for what they paid for it.
> 
> https://diversifiedroyaltycorp.com/investors/news/2016-09-01/
> 
> Interestingly, the stock is down on the news. So in summary, the market was worried about Franworks because of it's Alberta exposure and sent DIV's share price down over the past 12 months or so. And then, when the rights were sold for no loss and the Alberta overhang mostly removed, the stock went down. What don't you understand about the stock market?


I couldn't touch DIV because of Franwork. They were in danger of losing most or all of their $103M investment. They got $90M for it, but this is how bad it is - the owners sold a majority stake in their 99 restaurant chain for a net $3M, albeit one that is now free of the royalty. Franworks was out of money. 

Why the stock is down: DIV has lost $12.6M in royalties that they get $90M for, which is a 14% cash yield. There is virtually no chance of DIV obtaining a 14% cash yield in a high quality company. The Mr. Lube royalty was at an effective 8.9% rate. Management has hinted that they will be looking for a royalty replacement, but after this deal closes (maybe they have a new one by then), they will be looking at their dividend policy. A cut is very likely, unless they were able to issue new equity at a much higher valuation (very unlikely) or find a crazy good deal (also unlikely). A small cut at least, a bigger one if they decide to reinvest in the business.

This whole episode is very revealing into the royalty model, and shows the danger of these high payouts. One or two bad investments can result in serious jeopardy to the model. Why they don't move to a better model is a good question. Look at the mining royalty companies - SLW and FNV. They typically pay 20% out and reinvest the rest. The returns have been spectacular and bad investments do not result in chaos.

For me, I really like the last two royalties in the business, but don't like the uncertainty in the business model or the dividend level. Maybe if it drops a little more. This was a good deal, because if Franworks failed it would have been far worse than a few %.


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## CPA Candidate (Dec 15, 2013)

doctrine said:


> I couldn't touch DIV because of Franwork. They were in danger of losing most or all of their $103M investment. They got $90M for it, but this is how bad it is - the owners sold a majority stake in their 99 restaurant chain for a net $3M, albeit one that is now free of the royalty. Franworks was out of money.
> 
> Why the stock is down: DIV has lost $12.6M in royalties that they get $90M for, which is a 14% cash yield. There is virtually no chance of DIV obtaining a 14% cash yield in a high quality company. The Mr. Lube royalty was at an effective 8.9% rate. Management has hinted that they will be looking for a royalty replacement, but after this deal closes (maybe they have a new one by then), they will be looking at their dividend policy. A cut is very likely, unless they were able to issue new equity at a much higher valuation (very unlikely) or find a crazy good deal (also unlikely). A small cut at least, a bigger one if they decide to reinvest in the business.
> 
> ...


Your calculation of yield on a cash basis has to include the dividends that no longer have to be paid on the nearly 9 million cancelled shares that were issued to Franworks, which brings it down to about 11% as 1.98 million of dividends are now avoided. This corresponds well to the initial 12 million in royalties based on a 108 million investment in cash and stock (11.1% or so).

I really don't think Franworks will be an issue to replace nor do I think Franworks was a bad investment based on what was known at the time. What has happened to Alberta and oil is extraordinary event. The idea that DIV was in danger of losing their investment in Franworks but ended up recouping all of it is puzzling. Certainly, the outcome proves the investment wasn't as risky as perceived. Franworks isn't worth much because after rebuying the rights, it is very highly levered as it was before they sold them.

The problem with reducing the payout and accumulating cash is that it is very capital inefficient and detrimental to ROE. When an investment arises, it can be financed at that time. It would take a very long time indeed for cash to accumulate to the point where it would be enough to fund an acquisition of a new stream. The market perceives all dividend reductions as the end of the world, but adjusting a dividend based on the sale of a cash flow stream is just sensible.


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## doctrine (Sep 30, 2011)

You're right, it is a little better than I first thought with the 9M shares that will be cancelled, now worth $21.78. I think they'll be hard pressed to maintain the dividend though, and while sensible to cut, I wonder what the reaction will be. The Mr. Lube royalty is very high quality, as is the Sutton, so I think investors are willing to stay in. 

If nothing else, management has proven, unlike for say Alaris or Grenville, that they can get themselves out of deals that go bad and preserve capital. Really, from a company perspective, the deal was a home run. Hopefully they learn from the experience.


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## CPA Candidate (Dec 15, 2013)

DIV picked up the air miles intangibles and has very nearly funded its dividend now. Management has indicated they are looking for a 4th stream. 

https://diversifiedroyaltycorp.com/investors/news/2017-08-25/


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## doctrine (Sep 30, 2011)

It's good they found a new deal, however there are zero predictions around growth of Air Miles. Both Metro and Air Miles might pull out in the very short term. It's a good deal if it at least stays steady, but I noticed the lack of growth metrics in the deal.


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## londoncalling (Sep 17, 2011)

Here is an article from seeking Alpha which gives an in depth narrative of what has happened with DIV over the past year.

https://seekingalpha.com/article/4104654-diversified-royalty-necessity-can-mother-reinvention

It does leave me with a lot to think about and addresses what CPA and doc are discussing. I am in no rush to exit DIV but this position does have a fair amount of risk. I was a little concerned when the payout ratio was well above 100% but the latest move to purchase AirMiles could be a good one. If the damage done by the loyalty one cancellation fiasco can be repaired and contracts with Sobey's and BMO maintained then it will have been a good move. DIV will need to add another accretive stream as already mentioned.

Cheers


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## londoncalling (Sep 17, 2011)

Stock up almost 9% today on Friday's news indicating the acquisition on Nurse Next Door and a dividend increase. 

https://web.tmxmoney.com/article.php?newsid=7206592235258082&qm_symbol=DIV


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## damaaster (Mar 27, 2015)

I added to my position in Div recently at $3.04

Most important thing with the Nurse Next Door deal is that it brought their payout ratio below 100%.

They also secured more credit available in case they find another deal.

I wrote a small piece on DIV on my blog last week.

Cheers


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## londoncalling (Sep 17, 2011)

Hi Jordan,

I follow your blog and actually have many of the same holdings as you do. I have read your synopsis of DIV and would agree it is a good stock with lots of upside potential.


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## damaaster (Mar 27, 2015)

Nice - what other holdings do we share?

Glad you enjoy the blog. I expect to see DIV over 3.50 soon. Cheers.


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## londoncalling (Sep 17, 2011)

https://www.diversifiedroyaltycorp.com/wp-content/uploads/2020/11/DIV-Q3-2020-Earnings-Results-Final.pdf



Q3 Earnings yesterday.


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