FTSE 250 income

The first company is the music licensing investment trust Hipgnosis Songs Fund (LSE: SONG). 

This enterprise is one of only a handful of publicly-traded vehicles that allow investors to buy into music streaming rights. The group acquires catalogues of music streaming rights and then uses the income to fund additional acquisitions and sustain its dividend. 

At the time of writing, the stock supports a dividend yield of 5.7%. 

Some of its latest acquisitions include a catalogue from Fleetwood Mac songwriter and vocalist Christine McVie. This deal gave the company the song copyrights and writers’ share for seven of the 11 songs on the band’s self-titled album Fleetwood Mac, along with other intellectual property assets. 

The reason why I think this stock is a no-brainer buy is that as well as its market-beating dividend yield, it also trades at its net asset value. The last reported net asset value was $1.68 (125p) per share. I think this is a steal for a portfolio of intellectual property rights, which cannot be replicated. 

Those are the reasons why I would buy the stock for my portfolio today. However, I realise this might not be suitable for all investors as there is a certain level of uncertainty over how much the assets are worth. The most considerable risk the company faces is overpaying for intellectual property, which could lead to lower shareholder returns in future. 

Another dividend share I’d buy

As well as Hipgnosis, I would also buy Direct Line (LSE: DLG). In fact, I already own shares in this insurance company and would not hesitate to acquire more at current levels. 

Insurance can be a tricky business to get right. Correctly pricing insurance policies requires a lot of data, and companies can only really make money if they have economies of scale. 

Direct Line is one of the largest insurance groups in the UK, suggesting it has the economies required to succeed in the business. It is also branching out into other areas such as automotive service centres. The goal of this strategy is to help reduce repair costs for its customers. 

Based on current growth estimates, City analysts believe the stock is trading at a forward price-to-earnings (P/E) multiple of just 11.5. On top of this, the stock offers a dividend yield of 7.8%. This low valuation and high dividend yield are the main reasons I think this company is a no-brainer investment. 

Still, as I noted above, insurance can be a tricky business. As such, there is no guarantee the company will meet its dividend potential. A sharp increase in insurance losses could force management to cut the dividend. That is why this FTSE 250 firm may not be suitable for all investors. But I like it.

What is Hipgnosis?

Hipgnosis Songs Fund (LSE: SONG) is a fund listed on the FTSE 250 that owns song copyright, collecting royalties when these songs are played. Its portfolio consists of tracks, past and present, that have proven records of consistent royalty income. So far, its illustrious collection includes artists such as Fleetwood Mac/Lindsay Buckingham, Dua Lipa, Mark Ronson, 50 Cent, and many more. It also owns the rights to 36 of the 156 songs in Spotify’s tracks with over one billion streams.

The merits of investing in music royalties

There are several reasons why I believe this is one of the best shares to buy at the moment. Music royalties often provide a consistent level of income over the long term, especially if the songs cement their place in popular culture. How often do we hear the timeless classics of Go Your Own Way, Don’t Stop Believin’, and All I Want For Christmas Is You, decades after their release? Hipgnosis is also latching onto modern successes that will project revenue streams into the future; for instance, Ed Sheeran’s catalogue makes up a significant proportion of its portfolio. With the rise of streaming services, music has become accessible to a worldwide audience, and CEO Merck Mercuriadis aims to expand into South American markets by collaborating with artists from Hispanic and Latino backgrounds. (Some say we’ll never get the catchy chorus of Despacito out of our heads…)

Modern music services also tend not to be tied to the overall economic environment; that is to say this sector has a low economic beta. Artists’ content is played over many types of media (phones, TV, radio, and concerts) so investors are well diversified in case of a downturn. For instance, though the pandemic put the brakes on live performing for 18 months, masses of people turned to streaming services when confined to their homes. This diversification element is important for those who fear any further curbs on artists’ performance revenues.

You wouldn’t steal a song

One drawback worth considering is the threat of piracy that forever looms over digital artistic expression, stealing content and profits from official content providers. But the rise of streaming services has cut down on this illegal, virus-spreading activity as consumers are happy to pay small monthly amounts for the world’s music, rather than limiting one-off purchases like CD and vinyl.  

For these reasons, I believe that Hipgnosis shares are some of the best for me to buy right now.

Dividend stocks to buy

The first company I would buy is Moneysupermarket.com (LSE: MONY).

The group’s biggest challenge right now is the recently introduced regulation that insurance companies have to charge existing customers the same as new customers. This may reduce the need for customers to shop around, reducing the need for platforms like Moneysupermarket. This could have a significant impact on the group’s growth and income potential. 

Usually, high-growth internet stocks don’t offer much in the way of income. That’s not the case with Moneysupermarket. This online platform currently supports a yield of 4.4%.

The company is highly cash generative, which means it can afford to return lots of money to shareholders while investing in its brand. Over the past five years, its dividend has grown at around 5% per annum.

What’s more, the stock looks cheap. It is trading at a forward P/E ratio of 16.6, compared to the IT sector average of 28. That’s why I’d own the business as part of a portfolio of dividend stocks. 

Royalty income

The Hipgnosis Songs Fund (LSE: SONG) generates income from music royalties. The company’s goal is to produce a steady, predictable income stream for its shareholders that not influenced by economic trends. 

It is targeting a dividend of 5p per share in the long term. If it hits this target, the stock could yield 4.1%. Of course, there’s no guarantee the company will successfully meet this objective. 

One of the challenges the group faces is having to acquire enough music royalties. It isn’t the only enterprise chasing these assets. As a result, Hipgnosis has to pay higher and higher prices. This could impact shareholder returns if the business ends up overpaying consistently.

Another threat to the group’s long-term potential is illegal downloads of music. If there’s an increase in illegal downloads, Hipgnosis will struggle to earn a return on its investments.

Despite these risks, I think this is one of the best dividend stocks to buy. That’s why I would acquire the shares today. 

Investing for growth 

Premier Miton (LSE: PMI) is rapidly becoming one of the UK’s premier asset management businesses. The group has seen its net profit increase from just under £1m in 2016 to £11m in 2019. Analysts are expecting the firm to report a net income of £20m for 2021. It is trading at a forward P/E of 11.2 based on these figures, compared to the financial services sector median of 14.

This growth has funded explosive dividend expansion. For the current financial year, analysts reckon the company can distribute 7.9p, which would give a dividend yield of 5.5%, based on the current share price. 

These are just forecasts at this stage and should be treated as such. However, I think they show the company’s potential. 

Asset management is all about achieving good results for clients. This is the biggest challenge the corporation faces. If it fails to achieve good results for clients, they could desert the business. This may cause profit margins to fall, and the company may have to cut its dividend as a result. 

Still, I would buy this company as part of a portfolio of dividend stocks.

On song

FTSE 250 member Hipgnosis Songs Fund (LSE: SONG) invests in music royalty rights. Every time someone streams a track it owns, Hipgnosis receives a cut, albeit a very small one. The £1.2bn-cap already had almost 61,000 songs on its books by January. A little over 3,000 of these have hit the top spot in the charts. Recent catalogue additions includes work by Neil Young and Shakira. 

The performance of SONG since it arrived on the market in July 2018 has been solid, although not spectacular. Anyone buying the shares when Hipgnosis listed will have seen their capital grow by around 15%.

As one might expect, it’s not been a straight line up. Like everything else, the shares tumbled in 2020 as the coronavirus took hold. Then again, anyone buying the shares at the bottom of the market crash would have enjoyed an even bigger gain of around 28% by now. Naturally, this is far below the recovery seen in glitzy tech stocks. However, it’s a far better return than that of the FTSE 250 index as a whole over the same period.

Share price performance aside, it’s the dividend stream that interests me the most about Hipgnosis.

Cheap income

Analysts expect the business to return 5p per share to holders in the current financial year. This gives a yield of 4.2%, based on the price of the stock as I type.

Now, 4.2% may not be the biggest cash return I can find in the FTSE 250, but it’s not to be sniffed at. Let’s not ignore the fact that the best Cash ISA currently returns just 0.55% in interest. While keeping some cash in reserve for life’s little emergencies is prudent, holding any more than truly necessary will seriously limit the ability to grow one’s wealth. 

Another attraction to SONG’s dividends is that they’re likely to be covered over twice by profits. This means a cut looks unlikely as things stand. What a contrast to many other supposedly-reliable income stocks on the market!

But the dividend stream isn’t the only thing that makes me think Hipgnosis may be one of the best shares to buy today. A price-to-earnings (P/E) ratio of just 10 looks cheap, even if capital gains aren’t a priority.

It’s also worth paying attention to the firm’s PEG (price/earnings to growth) ratio. As a rough rule of thumb, anything below 1.0 suggests investors are getting a lot of bang for their buck. Hipgnosis’ PEG ratio is just 0.4. 

Not without risk

Although I consider Hipgnosis to be among the best shares to buy, no investment is without risk. There’s always a chance the company may be overpaying for the rights it’s buying. There’s also no guarantee that listening tastes won’t change and the popularity of formerly-lucrative artists may fall. 

On top of the above, you have the 1.35% ongoing charge eating into returns. While nothing in this world comes free, it’s vital to consider the opportunity cost of not buying other income-generating stocks where the only ongoing fee is charged by the broker.

Going for a song

There are more comprehensive summaries of how music royalties work, but basically, copyright owners licence others to perform, stream, insert into video games and adverts and sell physical copies of their song in exchange for royalty payments. The holder of a portfolio of copyrights thus faces a couple of challenges. One is to get the songs played or performed. The second is to collect the royalties. Piracy is a risk to both companies. There is also the worry that music licensors get larger and use their power to reduce the payments made to copyright holders.

Round Hill, I think, has the edge here. Its team has run a song royalties business for a decade. However, Hipgnosis is no slouch, as its management team includes former music industry insiders.

Tracking performance

Round Hill is buying out the copyright catalogue of a private equity fund — owned and managed by the same parent company — that has reached the end of its life, in two tranches. The first tranche was completed in February 2021 at the cost of $282m. The second purchase is expected to finalise in June 2021 and would exhaust the funds raised so far.

Although private equity assets are independently valued, related-party transactions always make me uneasy. The fund has provided annual revenue numbers for the first tranche of investments from its private equity fund. But there are no operating numbers for the private fund or Round Hill, which has just started.

On the other hand, Hipgnosis has a couple of years of financial data and has built its portfolio from scratch. I will ignore the 800% revenue growth, as Hipgnosis is only a couple of years old and building its portfolio. What is impressive are the net income margins of 33% for 2019 and 39% for 2020. And Hipgnosis has already paid dividends and yields somewhere between 4.2% and 4.4%.

Hipgnosis stock is a buy for me

Almost half of Hipgnosis’s current portfolio is pop music, and the majority of songs were penned within the last 10 years, but there are many contemporary classics in there. According to my calculations, Round Hills portfolio is more focused on rock and country (60% combined) and mature. Although the portfolios are converging, Round Hill’s does tilt towards the timeless classics, with Hipgnosis offering a more contemporary feel.

Song popularity peaks and declines sharply in most cases, and so do the royalty flows. More of Round Hill’s portfolio is likely to be past the peak compared to Hipgnosis’s. However, Hipgnosis’s portfolio is getting less pop-centric and older, suggesting it is building a firmer revenue base.

I favour more financial clarity over less, which, together with the portfolio convergence, makes the Hipgnosis stock a buy for me. Of course, I have the option to take another look at the pair once Round Hill can provide some performance figures.

However, long-term investors could benefit from buying undervalued London-listed stocks after the recent downturn. In time, they may yield robust returns, improving your financial prospects.

With that in mind, here are two FTSE 250 stocks that appear to be undervalued. They could be worth buying in the next few weeks to take advantage of their current valuations. 

Cheap UK shares 

Domino’s Pizza (LSE: DOM) seems to be one of the few companies benefiting from the current crisis. As other businesses have slashed staff numbers to cut costs, the pizza chain has hired an additional 5,000 workers this year to meet increased supply. 

Its latest trading update shows the strength of the business. Sales in the UK and Ireland increased by 19% for the 13 weeks to the end of September. The government’s VAT cut help boost demand. 

Based on this jump in sales, City analysts reckon the group will earn £71m this year. That’s up from £49m in 2018. Analysts also believe the jump in income will allow management to hike the company’s dividend payout by more than 100% to 9.4p for 2020. That implies the stock offers a dividend yield of 2.5% of current levels. 

Despite this impressive performance, the stock looks cheap after this year’s stock market crash. Shares in Domino’s are currently changing hands at a forward price-to-earnings (P/E) multiple of 21, that’s compared to a valuation of 32 for its US-based peers. 

As such, I think the stock could be worth purchasing as part of a diversified basket of UK shares in October. 

Stock market crash bargain

Investor sentiment towards the Hipgnosis Songs Fund (LSE: SONG) has deteriorated since the beginning of the year. The company was founded to purchase music royalty rights. It pays upfront for the rights to songs, which then generate a steady stream of income for the firm and its investors. 

This business model is yielding results. The stock currently offers a dividend yield of 5p per share, which is funded by music royalty income. Based on the current share price, this gives the stock a dividend yield of 4.3%. 

At a time when so many other companies have reduced or eliminated their dividends, Hipgnosis’ payout looks highly attractive. The business is also, to a certain extent, pandemic proof. Even at the height of the lockdown restrictions, consumers were still able to listen to and purchase music. 

Management is continuing to build the group’s music royalty portfolio. This should help the company grow its distribution in the years ahead. 

After the stock market crash, shares in the income champion are currently changing hands at a P/E of 9.8. This valuation, coupled with the company’s healthy dividend payout, suggests to me this business could make a great addition to any portfolio of cheap UK shares.

Anyone who has seen the film About a boy will have wondered what it would be like to earn royalties from a song. Well now there is an asset class that allows you to do exactly that across an entire portfolio of music.

Protection from a stock market crash?

Hipgnosis Songs Fund (LSE: SONG) owns a portfolio of song royalties. Merck Mercuriadis, who set up the fund, is no stranger to the music business. He has managed artists including Beyoncé, Elton John, Iron Maiden, and Guns N’ Roses.

The royalties provide a regular, reliable income stream. There appears to be no correlation between the fund and the state of the economy or the stock market. In my opinion, this makes it a great hedge against a second stock market crash.

The fund currently pays quarterly dividends of 1.25p and had earnings per share last year of 10.7p. This stable dividend of just over 4% therefore looks very appealing in the current market climate.

Hipgnosis only listed on the market in July 2018, but its portfolio has already swelled to over 13,000 songs. The company market cap recently broke through £1bn and was propelled into the FTSE 250 in March this year.

The fund owns a stake in four out of the top five Billboard songs of the decade. It also owns a stake in eight of Spotify’s top 25 most played songs of all time.

Artists and songs are too numerous to mention but include Uptown Funk and Shape of You. This month it bought the future royalties to all 197 Blondie songs.

Hipgnosis believe it can manage the songs better to maximise their income potential through video games, TV commercials, or cover versions.

Going for a song?

In my opinion, the price looks fair, but not a bargain. July financials reported an operative net asset value of 116.7p and the fund has since added to its catalogue. The portfolio has been acquired on an average multiple of 13.9 times historic annual income.

It has returned 22.7% including dividends since IPO two years ago. I think this shows the protection the fund provides from a stock market crash.

In terms of risks, I would point out that song royalties are probably not the most liquid of assets. There is also an element of being subject to popular opinion or trends. However, management insist it only invests in songs with a proven track record and reliable income stream.

I think this fund provides a great way to diversify your portfolio in an asset class that protects you from a stock market crash. If I were a retiree looking for a reliable income stream through dividends, I would give Hipgnosis some serious consideration.

Hipgnosis is completely different to any fund the market has seen before. Unlike most funds, which invest in traditional assets such as stocks, bonds and property in an attempt to outperform the market, Hipgnosis owns a portfolio of song royalties. These royalties provide an income for the group, part of which it reinvests, with rest distributed as a dividend. 

I’m fascinated by this business model because it’s so completely different. Historically, music royalties have the preserve of the rich and famous, but Hipgnosis has opened the investment class up to the masses. 

Different asset class

One of the primary reasons why I like the look of Hipgnosis is the fact that music royalties are completely different to any other asset class. Unlike stocks and bonds, their price doesn’t fluctuate with investors’ views on the economy. Although the income stream from music rights may vary (depending on popular opinion), the fact that this asset isn’t cyclical should mean Hipgnosis provides a steady income for its investors whatever the weather. 

Management is focusing on acquiring high-quality rights for the portfolio. For example, at the beginning of the year, it purchased a music catalogue from Dutch record producer, songwriter and musician Giorgio Tuinfort, which comprises 182 songs in total, including 23 number-one hits and over 15 UK top-10 singles with David Guetta.

More recently, the fund acquired a music catalogue from Itaal Shur, which includes the multi-platinum song Smooth, as well as the rights to 208 other songs including a US top-10. 

Market-beating potential 

Hipgnosis rarely discloses the prices paid for music rights, so it’s difficult to calculate how much the firm is worth. However, we do know that at the end of September, management valued the royalty portfolio at just under £200m, or 97.7p per share. That was four months ago now. Since then, Hipgnosis has announced a string of further deals so I think it’s reasonable to assume the net asset value has since exceeded 100p per share. 

With the stock trading at 109p at the time of writing, I think it offers good value at this level. What’s more, the company is targeting a dividend for the first 12 months following its admission to trading (July 2018) of 3.5p per share. That gives a prospective yield of 3.2% at current levels. 

The fund’s dividend potential, coupled with Hipgnosis’ net asset value growth, leads me to believe that this one-of-a-kind investment can outperform the FTSE 100 in 2019. The steady income stream from royalties, coupled with the fact that cash flows aren’t subject to economic booms/busts, implies that the enterprise could produce an attractive high single-digit total return for investors in 2019. Meanwhile, the FTSE 100’s outlook is more dependant on global economic growth. 

With economic headwinds growing, FTSE 100 investors could be in for a tough time this year. Hipgnosis looks as if it could be a safe haven in these stormy waters, and that’s music to my ears.  

One such firm is Tritax EuroBox (LSE: EBOX), a REIT focusing solely on European big box warehouses. If the name sound familiar that’s because Tritax is the manager behind the UK-focused Tritax BigBox, which has done very well and over the past five years delivered a total return of over 80% thanks to a hefty dividend and capital appreciation.

The plan for EuroBox is much the same as for Tritax’s first publicly-traded REIT, namely to use the £301m it raised with its IPO to buy up large warehouses situated near major motorways and sign long-term leases with blue-chip customers. This same strategy has worked phenomenally well in the UK thanks to fast-rising demand for such warehouses from pureplay e-commerce retailers and traditional retailers that need to quickly and efficiently deliver goods to customer’s homes as well as to stores.

With little to suggest that this trend will slow down any time soon, EuroBox is well-positioned then to profit from its ability to purchase existing locations or to build its own warehouses on a completely pre-let basis, which removes a huge amount of risk for the fund and investors. As the fund just went public and is in the process of making its first purchases, returns are completely hypothetical right now, but Tritax is targeting a 4.75% dividend yield and medium-term target return of 9%.

Both of these targets look eminently achievable in my eyes and given Tritax’s great track record with BigBox, I think income investors would be well-served by checking out EuroBox for themselves.

A novel market newcomer

While EuroBox investors can at least use the track record of BigBox and US-listed warehouse REITS as a guide to what to expect, investors in the brand new Hipgnosis Songs Fund (LSE: SONG) are very much on their own.

Hipgnosis has been set up by music industry veteran Merck Mercuriadis, who has served as manager to Elton John and Guns N’ Roses among other big names, to purchase writers’, publishers’ and performance rights to songwriters’ creations. The company’s IPO raised £202.2m towards the end of June and the fund has already made its first investment, a 75% interest in the catalogue of songwriter The-Dream for $23.75m. This purchase includes the rights to 302 songs performed by artists such Justin Bieber, Jay-Z and Rihanna.

Once it owns the songwriter’s rights to songs, the fund can license them as well as earn royalties each time they are played. This income stream is intended to be directed towards further acquisitions and steady dividends paid to shareholders. Management’s target is for an initial dividend yield of around 5% with annual NAV returns of 10%.

The fund is certainly a novel idea and with big names in the music industry lined up behind it, it certainly won’t lack for insider knowledge and expertise. However, with a relatively untested businesses model I’ll be watching from the sidelines for the time being to see how it all shakes out for Hipgnosis.