Permian Basin Royalty Trust (NYSE:PBT): “Cash Cow” Yielding 7.6%
September 11, 2017
Lock In This 7.6% Yield
Today, I’m going to share my favorite source of high yields in the stock market: “cash cows.”
I came up with the term “cash cow” to describe old, stodgy operations that crank out steady profits. Because they don’t have much growth potential, owners just milk these businesses for income.
Case in point: Permian Basin Royalty Trust (NYSE:PBT). Investors tend to overlook this name because it doesn’t come with a “sexy” growth story. But if you’re looking for steady income and a big yield, you’ll like this name just fine.
The story is pretty straightforward here. For starters, PBT owns about 1,200 oil wells across West Texas. Each month, most of the proceeds get paid out to unitholders.
You’re not hoping to strike it rich on the next gusher; these wells have produced for years, cranking out oil until they run dry. It’s a bit like drinking the bottom of a milkshake, with operators sucking pretty hard to get the last bit out of the glass. But, while the business might put traders to sleep, it can be quite lucrative.
Drilling a well costs a lot of money upfront. Ongoing costs, though, come in at only a fraction of sales.
In July, the trust grossed $2.4 million in sales. Aside from a few overhead expenses, almost all of this income flows right to the bottom line. And, as long as crude prices stay above $10.00 per barrel, management will continue pumping for oil. (Source: “Permian Basin Royalty Trust Announces July Cash Distribution,” Permian Basin Royalty Trust, August 21, 2017.)
For owners, this has created a tidy income stream. Over the past year, PBT paid out $0.63 in distributions. This comes out to a trailing yield of 7.6%.
These payments will ebb and change over time, resulting in a much more volatile income stream than traditional dividend stocks. Oil field production tends to decline over time and royalty payments fluctuate with commodity prices. Based on the latest estimates from management, anyway, investors can expect the distribution checks to keep rolling in for another decade.
Bottom line: Wall Street loves growth. Funding an expanding business, though, can suck up huge amounts of cash flow, which doesn’t leave a lot of money left over for owners.
That’s what makes cash cows like Permian Basin stock so interesting. These firms toiled for years to build their operations. Now we get to sit back, kick up our feet, and enjoy the fruits of that labor.
