Updated on April 1st, 2019 by Josh Arnold
Investors can buy stock in companies of all shapes and sizes thanks to the diverse offerings available in the stock market.
Companies with market capitalizations of $10 billion or more are considered large-caps. Small-caps have market capitalizations below $2 billion.
However, there are even smaller companies that trade in the United States. For example, microcaps are generally companies with market capitalizations of $300 million or less.
Cross Timbers Royalty Trust (CRT) is a microcap, and a tiny one at that—it has a market capitalization of just $69 million.
Its market capitalization is minuscule, but its dividend is anything but. If Cross Timbers’ market capitalization were larger, it would be one of about 400 established stocks with a 5%+ dividend yield (the list below excludes microcap stocks).
Plus, Cross Timbers pays a monthly dividend, which means investors get paid more frequently than they would with the more typical quarterly or semi-annual dividend schedule.
Despite the benefits of monthly dividend stocks, there are very few companies that distribute profits on a monthly basis. Sure Dividend has compiled a database of the 41 monthly dividend stocks, which you can access below:
This article will discuss Cross Timbers’ business model and whether it has appeal for income investors.
Cross Timbers Royalty Trust was created on February 12, 1991, and it makes money from two sources.
First, income is derived from a 75% net profits interest from seven oil-producing properties in Texas and Oklahoma, operated by established oil companies.
In addition, income is generated from a 90% net profits interests from gas-producing properties in Texas, Oklahoma, and New Mexico. The primary-gas producing field is the San Juan Basin in northwestern New Mexico.
The trust was created to collect net profits income, then make distribution payments to unitholders.
Net profits income received by the trust on the last business day of each month is paid by XTO Energy, a subsidiary of ExxonMobil (XOM).
CRT’s 75% net profits interest is reduced by production and development costs, while the 90% net profits interest is not subject to these costs.
Without production and development costs, the 75% net profits interest income is usually only affected by changes in sales volumes or commodity prices.
For the first three quarters of 2018, Cross Timbers was able to fairly significantly increase its distributable income. In the third quarter alone, Cross Timbers was able to boost its net profits income from $1.674 million to $2.257 million.
The 35% increase was due primarily to higher oil prices and to a lesser extent, higher production volumes. In addition, the trust benefited from lower costs.
Source: Q3 earnings release
For the first three quarters of 2018, net profits income was up 39% to $6.868 million. Administration expense has also risen, but much less quickly than income. As a result, distributable income per unit for the first three quarters of 2018 rose to $1.06 per share against $0.74 in the comparable period of 2017.
Cross Timbers is seeing great benefits from higher oil prices in particular, and given recent strength in that commodity, the trust’s outlook is in better shape than it has been in recent years.
One of the major catalysts for CRT moving forward would be higher oil and gas prices. Falling commodity prices weighed on the income derived by the trust in recent years, which limited distributable income and therefore, the share price.
Oil is around $60 per barrel in the US, which is affording Cross Timbers tremendous growth in its distributable income.
Cross Timbers had an average realized oil price of just $38.02 per barrel in 2016, but that number should be in excess of $50 when Cross Timbers reports Q4 and full-year earnings. With sizable strength in oil prices to begin 2019, it appears Cross Timbers’ distribution will remain elevated, at least for the near-term.
As a result, elevated oil prices should continue to be a boost for Cross Timbers. There is some reason for optimism in this area—oil prices are still near $60 per barrel and have shown considerable strength recently.
Cross Timbers has very minimal operating expenses since it is a royalty trust. This means that its operating leverage is huge when revenue rises, such as it did in 2018.
Because of this, oil and gas prices are absolutely critical for the trust’s distributable income, and therefore, its growth is almost entirely dependent upon commodity prices.
There isn’t much the trust can do to impact growth, so shareholders should certainly be aware of this. Cross Timbers is a passive play on collecting royalty income.
Since Cross Timbers is a trust, its dividends are classified as royalty income. And since the distributions are considered ordinary income, they are taxed at the individual’s marginal tax rate.
Cross Timbers’ dividends are declared 10 calendar days prior to the record date, which is the last business day of each month.
In 2018, Cross Timber paid cumulative dividends of approximately $1.43 per share, good for a 12.4% dividend yield on the current share price.
However, over the first three months of 2019, the company paid dividends of $0.18 per share. On an annualized basis, this would result in a full-year payment of $0.72, representing a forward yield of 6.4%.
The trust continues to distribute essentially all of its income, as it has since its inception. Dividend coverage is never going to be strong given that Cross Timbers is required to distribute basically all of its income.
Future distribution growth is reliant upon higher distributable income. As a result, the trust’s dividend growth potential is essentially a bet on oil and gas prices.
If commodity prices continue to rise, there is a good chance for continued distribution growth in 2019. However, declared distributions for the first three months of 2019 are just $0.18 compared with approximately $0.34 in the same period last year.
Cross Timbers’ dividend has moved around wildly throughout its operating history, so this isn’t unusual, but it does put some additional pressure on the distributions for the rest of 2019.
The bottom line for Cross Timbers’ distribution is that it is very unpredictable and while the headline yield is enticing, keep in mind there is significant variability in any particular month’s payout, depending on commodity prices and production levels.
Cross Timbers gives investors a unique way to play potentially higher oil and gas prices in the future, all while realizing monthly income along the way.
At the same time, there are risks and unique characteristics that investors should take into account before buying shares of a royalty trust.
Cross Timbers is a microcap, meaning it is more volatile and thinly-traded than larger companies. It is also a trust, which carries its own risks.
Finally, Cross Timbers is not a long-term ‘sleep well at night’ dividend growth stock. Future results are dependent upon oil and gas prices and the true amount of reserves in the properties it has interests in.
As a result, Cross Timbers is only a recommended stock for investors who accept the risks of royalty trusts and microcaps.