PDL Biopharma is another interesting company that has become of particular interest to me. The company only has 10 employees and its business model is simply collecting revenues from is royalty portfolio. This is the companies only operation. I love companies that generate royalties because they usually have very large gross margins due to the lack of expenses. In order to value PDL BioPharma we must use a discounted cash flow analysis. The idea is to try be conservative in estimating the future royalty payments until 2015 when the patents expire.
PDLI revenue has grown by 24% over the past 5 years. Using a very conservative growth rate of only 12% as compared to 24% I calculate PDLI generating about $2.7 billion over the lifespan of the royalty portfolio. This equates to a net income of about $1.6 billion. Assuming a dividend payout ratio of 60%, the company would pay out $8.00 a share in dividends. The leftover $600 million would be used to pay all the companies debt of $400 million.
PDLI BioPharma is a great investment because it provides steady income from its royalty portfolio. The company currently pays out $1.00 in dividends a year for a dividend yield of 16%.