Duke Royalty: a princely return for income investors
Britain’s only listed royalty-finance company chooses its clientele wisely, making it a compelling income play


With interest rates well below inflation, it is difficult to find deposit accounts offering over 0.4%. I have therefore previously highlighted several large, stable companies with modest dividend yields just above deposit-account returns, but with reasonable growth prospects. This month I am recommending a smaller company with a unique business model that enables it to offer a much higher yield with moderate risk.
The company is Duke Royalty (Aim: DUKE), which lends companies money in return for a royalty on future sales. It provides finance at a lower cost than private equity and does not take control away from the owners, as private-equity lenders do.
Duke typically offers between £5m and £20m and can give a decision on making the money available in about eight weeks. The royalty agreement can be likened to a corporate mortgage where both principal and royalty are paid back over a period of 25 to 40 years. The initial yield on Duke’s investment is 12%-14% of capital provided and the royalty rate is reset upwards or downwards each year (between a 6% increase and a 6% fall, depending on the client’s sales performance), so Duke participates consistently in a client’s growth. The company can buy back the royalty after three years by paying the initial principal along with a 20% redemption premium.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Royalty finance
Royalty finance is well established in North America, where it is a $50bn sector, and Duke has brought the idea to the UK and Europe. Duke is the only listed UK royalty company, having taken over its only British competitor, Capital Step, in 2019. Typical clients are well-established, profitable, owner-managed medium-sized businesses wishing to expand by acquisition, buy out a minority shareholder, or finance a management buyout from a larger company.
Duke tempers the risk in its investments by stipulating that royalty payments should be worth significantly less than 50% of a company’s cash flow. Duke seeks firms with a sustainable competitive advantage. It avoids start-ups, oil and gas, mining and biotech companies, and aims to diversify by industry and geography. Two of Duke’s typical client companies are United Glass Group (UGG) and Brightwater Selection. UGG is one of the UK’s leading glass merchants and processors. Duke provided it with funding of £6.5m in April 2018, which allowed it to refinance existing debt and buy out a minority equity stake in a key subsidiary. A second investment of £4.5m facilitated the acquisition of London Architectural Glass and purchase of a key facility’s freehold.
Brightwater Selection, a recruitment company, was a management buyout funded with £1.9m from Duke. A further £7.7m was provided to Brightwater in January 2020 to acquire PE Global, a leading healthcare and life sciences recruiter in Ireland. Duke’s results for the year to the end of March 2020, the last before the virus, show that it had 12 royalty partners (clients) and made substantial follow-on investments in three of them, so that £20.4m of new capital was deployed during the year.
To finance expansion, it raised new equity of £17.5m and refinanced a revolving credit facility on better terms; the facility was also increased to £30m. Cash revenue for the year was £10.4m, up by 91%, with net cash inflow from operating activities £6.8m, up by 65%, and total dividends for the year 2.95p per share, up by 5%. Given the uncertainties in 2020 about the effects of Covid-19, Duke wisely preserved cash by paying the first two quarterly dividends of 2020/2021 as scrip dividends of 0.5p.
Still, the positive trading update for the third quarter of 202/2021 said the cash position had improved, so a cash dividend of 0.5p was paid. The results for the year to the end of March 2021 showed operating net cash flow up to £8.94m from £6.78m in 2020 and £4.11m in 2019. The 2020/2021 results encompassed the virus period and demonstrated the resilience of Duke’s royalty model.
A juicy and growing dividend
Duke’s costs are fixed so increases in revenue work straight through to the bottom line. It is therefore encouraging that 2021 has so far seen five new royalty deals, including a £6.2m investment in Fabrikat (a well-established steel fabricator), and a new €10m agreement in June with Fairmed Healthcare Group of Switzerland .
There were more deals in July, August and September. Further investments have been made into existing partners, such as £6.5m in UGG to fund another acquisition. The first royalty partner in North America has been secured. Three exits so far in 2021 have raised £18m. Duke has liquidity of more than £55m to fund its growing pipeline of opportunities.
In assessing Duke as an investment, the key issue is whether the dividend can increase. This is determined by the number of new royalty partners and whether partners are well chosen and can grow their businesses to increase royalty payments. The virus in 2020 provided a stiff test of clients’ quality and it is reassuring that the key measure of operating cash flow per share has increased from 2019 to 2020 and then again, to 3.68p per share, in 2021. This gives investors confidence in Duke’s prospects. Its shares cost 50p in late 2019, fell to 19p and are now around 43p. Dividends of 2.25p were paid in 2020-2021, giving a trailing yield of 5.3%. The annual dividend yield has ranged from 5% to 8% since flotation in 2017.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Highly qualified (BSc PhD CPhys FInstP MIoD) expert in R&D management, business improvement and investment analysis, Dr Mike Tubbs worked for decades on the 'inside' of corporate giants such as Xerox, Battelle and Lucas. Working in the research and development departments, he learnt what became the key to his investing; knowledge which gave him a unique perspective on the stock markets.
Dr Tubbs went on to create the R&D Scorecard which was presented annually to the Department of Trade & Industry and the European Commission. It was a guide for European businesses on how to improve prospects using correctly applied research and development.
He has been a contributor to MoneyWeek for many years, with a particular focus on R&D-driven growth companies.
-
Crypto assets of seven million UK investors at risk – how to keep yours safe
Cryptocurrency wallet rules make it hard to track down assets after someone has died, even if they leave a will saying who they would like to inherit them
-
Could DeepSeek boost China tech stocks?
DeepSeek appears to have been and gone as far as the stock market’s reaction is concerned, but Chinese tech companies are eagerly embracing advances in AI
-
8 of the best properties for sale with kitchen gardens
The best properties for sale with kitchen gardens – from a 17th-century timber-framed hall house in Norfolk, to an Arts & Crafts house in West Sussex designed by Charles Voysey with a garden by Gertrude Jekyll
-
Why investors can no longer trust traditional statistical indicators
Opinion The statistical indicators and data investors have relied on for decades are no longer fit for purpose. It's time to move on, says Helen Thomas
-
Investors rediscover the virtue of value investing over growth
Growth investing, betting on rapidly expanding companies, has proved successful since 2008. But now the other main investment style seems to be coming back into fashion.
-
8 of the best properties for sale with shooting estates
The best properties for sale with shooting estates – from an estate in a designated Dark Sky area in Ayrshire, Scotland, to a hunting estate in Tuscany with a wild boar, mouflon, deer and hare shoot
-
The most likely outcome of the AI boom is a big fall
Opinion Like the dotcom boom of the late 1990s, AI is not paying off – despite huge investments being made in the hope of creating AI-based wealth
-
What we can learn from Britain’s "Dashing Dozen" stocks
Stocks that consistently outperform the market are clearly doing something right. What can we learn from the UK's top performers and which ones are still buys?
-
The rise of Robin Zeng: China’s billionaire battery king
Robin Zeng, a pioneer in EV batteries, is vying with Li Ka-shing for the title of Hong Kong’s richest person. He is typical of a new kind of tycoon in China
-
Europe’s forgotten equities offer value, growth and strong cash flows
Opinion Jonathon Regis, co-portfolio manager, Developed Markets UCITS Strategy, Lansdowne Partners, highlights forgotten equities he'd put his money in