There are only two reasons to make in investment in a company. These are income from dividends or other similar payments and increases in market valuation. Both are and will be adversely impacted by a reduction in the profitability of the company. Were there to be a recession it is likely that there would be a decline in earnings per share (EPS).

The revenues of companies will also be adversely impacted to varying degrees depending on the products or services offered by the company. However, it is likely that revenues will continue to be generated, and that the percentage of revenues agreed to be paid to the owner of a royalty will continue to be paid.

Therefore, the royalty investor will continue to receive a benefit while the business owners will suffer both a loss of income and market valuation. The loss of market valuation is likely to be greatest in companies enjoying high price earnings ratios, usually accompanying relatively rapid EPS growth or the promise thereof.

If royalty investor benefits continue, rather than having a loss of benefits, is it not logical that investors choose royalties as the vehicle for investing if they believe a recession is a valid concern?

 

Arthur Lipper, Chairman                 arthurlipper@gmail.com
British Far East Holdings Ltd.