Mills Music Trust (MMTRS): A Pure Play Decades Long Stream of Future Royalties on Old-Timey Songs Available at More Than an 8% Pre-Tax Yield
Mills Music Trust (MMTRS) is an illiquid, over-the-counter stock. In fact, it’s not a stock at all. The security traded is a “trust certificate” that entitles the holder to quarterly distributions from the trust. These “dividends” are not dividends. The trust has not paid taxes on the income. So, you will be taxed on the income received. As a result, you’ll need to adjust the after-tax return on Mills Music Trust as compared to other stocks you might own. Since I don’t know your tax situation, I don’t have a way of doing that.
The trust was created in 1964. Its life may extend till something like 2088. The way it’s written the trust will be dissolved at the end of the calendar year during which the last copyright expires and can not be renewed. Based on a table of the 50 top performing copyrights in the Mills Music Trust catalog – I believe this won’t happen before 2088. However, the trust renegotiated something important with EMI (the publisher that collects royalties on behalf of Mills) that makes the end date for the trust less important. The original trust arrangement required a minimum royalty payment of $167,500 per quarter. This is not a small number when you consider that there is a copyright that won’t expire till 2088. So, the contingent payment made to Mills would presumably have been $670,000 a year in 2087 (and for many, many years before that). Now, it’s likely the dollar will have depreciated quite a bit in the 67 years between today and 2087 – but, $670,000 a year is still a ton more than the songs in the Mills Music Trust catalog will be producing in royalties in that year. This is because the vast majority of the copyrights on valuable songs will expire in about 25-30 years. Mills provides information on when copyrights for songs may expire. But, as most of these songs are all governed by the same copyright law, a pretty good guess is simply date of creation plus 95 years. So, these valuable songs I expect to come off copyright (and go into the public domain) in the next 25-30 years were created in like the 1920s. Almost all of the royalty streams you’ll be getting here are derived from pre-1958 songs. And then, because of the general rule that a song will be off copyright after 95 years (no matter what is done to try to renew it) – we can assume that these songs don’t much pre-date the early 1900s. In fact, almost all the songs of value seem to date from 1922-1958. There’s about a 30-year period where many of these more valuable copyrights were created. And those were the roughly 30 years before the trust was created. Mills gives details on what these songs are. Some of the biggest royalty producing songs for Mills right now are:
Little Drummer Boy
Sleigh Ride
Lovesick Blues
Stardust
Hold Me, Thrill Me, Kiss Me
It Don’t Mean a Thing if It Ain’t Got That Swing
I’ve Got the World on a String
Mills had been entitled to 65% – 75% of gross royalty income prior to 2010. Mills then agreed to a new deal under which the minimum royalty payment was removed and – Mills believes, but EMI does not – all songs would now pay Mills 75% of gross royalty income. Do I believe what Mills believes and not what EMI believes? Honestly, yes. But, I’ll put even odds on this dispute – 50% chance that EMI is not underpaying Mills and 50% chance that EMI is underpaying Mills – when I calculate the probability weighted earnings power (or, in this case, distribution power) of the trust certificates. Right now, what you need to know is that there’s some chance that EMI is now and has been – for each of the last 4-5 years I’ll be looking at to do this calculation – underpaying Mills. As a result, there’s a chance that the distributions trust certificate holders have been getting understates what they will get in the future. One exception to this is an especially large distribution made in 2019. The 2019 distribution was especially large because EMI agreed to a $1 million settlement. EMI paid the $1 million settlement after being presented with an audit done by an auditor hired by Mills to investigate Mills’ claims of deficiencies on the part of EMI in payments made from 2010 to 2015. The auditor got about $130,000 for its trouble. So, Mills netted about $870,000 (remember, this is all “pre-tax”) over a period of 5 years. That works out to $174,000 per year. There are 277,712 trust certificates. So, that’s about 63 cents per trust certificate per year – net of auditor fees – that Mills was not distributing to certificate holders from 2010-2015, because EMI wasn’t paying. Mills believes EMI is wrong again. The settlement with EMI did not cover any period after 2015. Mills believes that it has been underpaid by a cumulative amount of $600,000 during 2016, 2017, 2018, and 2019. That works out – this time, before auditor fees – to about $150,000 in unpaid distributions due to EMI deficiencies per year. That’s 54 cents per share.
Actually…
It’s a little more complicated than that. In a sense, buying Mills Music Trust certificates today is like buying a cumulative preferred stock that is currently “in arrears.” If and when EMI settles up or starts paying at the royalty rate that Mills believes it is owed – two things could happen. One, you could get the accumulated deficiency less auditor fees, etc. In this case, let’s say that’s $600,000 less a similar audit cost would be $470,000. The deficiency is constantly building up – and the audit cost probably does not build at the same proportionate rate as the deficiency does. If we take out $130,000 for an audit and then divide by the trust certificates outstanding: there is at least $1.70/share (remember, these aren’t shares – they’re “certificates”) in cumulative arrears. If EMI keeps paying the way it is – this cumulative arrears pile could grow by as much as 10 to 15 cents per share per quarter. So, by the time you are reading this, it may be bigger. In another quarter or so it could be $2 a share. Should we lop this off the stock’s price? As I write this, the last trade was $30.50. The bid was $31.25. The ask was $35. I’m not going to discuss how to trade illiquid stocks here. But, please don’t look at the bid/ask spread of $31.25 / $35 and think you should pay a price somewhere in between (or even worse, think you should pay the ask). If you ever do buy a stock like this, don’t do more than beat the best bid. Unless you have reason to believe a lot of certificates could come your way if you bid close to the ask – don’t do it. For that reason, the last trade or the bid are the relevant bits of price info here. Normally, we use the last trade when talking about stocks. So, I’ll do that here: $30.50/share. Given the “arrears” the stock has built up – are you really paying more like $28.50 to $29 a share for the future distributions of Mills Music Trust.
Like I said, I’ll be using a 50/50 approach here. I will assign a 50% chance the “arrears” are paid in full to you as Mills claims they should be. And – far more importantly – I’ll be assuming that there’s a 50/50 chance EMI will start paying in the future at the higher rate that Mills believes it deserves. This second point is more debatable. One thing that will drive trust certificate holders crazy here is the constant lag and uncertainty of payments. The 5-year average annual payment per share – excluding the EMI settlement – was $2.55/share. Like I said, Mills believes that they’ve been short-changed by about 54 cents per share these last several years. As a result, the “dividend yield” of Mills Music Trust going forward is pretty open to interpretation. Is it $2.55/$30.50 = 8.4%. Or, is it: $3.09/$28.80 = 10.7%. In fact, it could be even higher than that last number. I’m using the 5-year average distributions. If I adjust for the EMI payment, the actual cash distributions by year look like this:
2015: $2.69
2016: $2.19
2017: $2.14
2018: $2.85
2019: $2.90
Maybe you see a trend there. I wouldn’t stake my life on it. But, if you take the last year’s distribution and add 54 cents in underpayments to it – you get $3.43 as the “earning power” here. And when you deduct the “arrears” from the current stock price, that gives you a dividend yield of 11.9% ($3.43/$28.80).
What’s the truth?
Well, the range is probably a payment of between 8% and 12% a year. I could give you the probability weighted figures I calculated – but, I think that’s overly technical. You can guess at the same result by saying the range is 8-12% and with 50/50 odds EMI is right and 50/50 odds Mills is right – that gets you about a 10% yield. This yield is not taxed. However, it’s also not contractually capped. It will hold up to inflation much better than long-term bonds.
What long-term bond should we compare Mills Music Trust to? This isn’t an easy comparison. The risks here are different than corporate risks. The payments are more protected against inflation. Upside is more possible here. But – most importantly – Mills Music Trust is effectively a “stripped” side of a bond. It’s all coupon and no face value. There is no minimum royalty agreement anymore. And Mills does not have to pay you back any sort of value at the “maturation” of this bond. That’s because it’s not a bond. It’s just a series of payments probably stretching over the next 25-30 years mostly.
The “yield” here is probably double a lower grade (but still investment grade) 30-year corporate bond. The advantage in terms of basis points is enough to offset the fact you won’t get paid back any lump sum at the end of this “bond’s” life. What I mean by that, is you’ll likely collect more than 5% a year on your investment higher than just the amount you’d be getting in interest on a long-term bond. So, if you think this is as safe as an investment grade bond – yes, it looks very cheap.
Is it as safe?
I don’t know. But, I do know it’s a lot safer than I initially expected. It’s not difficult to see how much of the royalties are backed by a handful of very durable songs. The “management” here is also strongly on your side. So, theoretically this is just a trust with a bank (HSBC) acting as the corporate trustee and then two individual trustees. However, the individual trustees are both really “shareholders” here. One is the head of MPL Communications. He runs Paul McCartney’s investments in music rights. The other runs Buttonwood Tree Value Partners. It owns a lot of trust certificates too. So, you actually have two of the biggest “shareholders” as your trustees here. First Eagle (the value investing shop) also owns a bunch of trust certificates. HSBC (actually, its predecessor) has been the corporate trustee for over 50 years. The auditor has been auditing the financials of Mills Music Trust for the last 17 years. Mills was the only public issuer client it was auditing as of its last inspection report – and the PCAOB didn’t flag any issues with that audit (which we know was the audit of Mills). Not bad for a tiny trust. But, remember, this auditor doesn’t know anything about EMI’s books. And that’s what matters here. Overall, it looks like a solid auditor, a solid – and active enough to pay to have EMI’s books audited – couple of trustees with skin in the game. The set-up here looks a lot better than many trusts I see. And the assets backing the trust are much more solid than what is backing a lot of publicly traded trusts.
What’s the downside?
If you adjust for the probability EMI might not pay any of its past deficiencies, might not pay more in the future, etc. and you consider that taxes to be paid on trust income could be high versus dividends – this is nothing like a stock with a dividend yield of 8-12%.
In fact, I’m not sure that an unleveraged investment in Mills Music Trust will outperform an unleveraged investment in a public company (even a much more expensive public company) that’s re-investing most of its earnings. There are many banks that pay a good dividend yield but still retain two-thirds of earnings and thereby grow book value while deferring additional dividend taxes. There are growth companies that retain all earnings. There are stocks about as cheap as Mills on a “P/E” basis (technically, Mills has no “e”) that buyback a lot of stock.
I said unleveraged a couple times there. The truth is that an investment in Mills – given the relative safety (it’s a lot safer than other stuff yielding 8%+ a year) should be funded with debt. Now, Mills itself is presumably not a purchase you can do on margin. It’s an OTC stock. It files with the SEC. But, it’s not listed and it is illiquid. Of course, money is fungible. So, the fact you can’t buy Mills on margin doesn’t mean you can’t offset however much Mills you do buy with borrowed money elsewhere in your account. Buffett had a practice in his partnership days of borrowing 100% of whatever amount of his portfolio he currently had in “workouts”. So, if 10% of his portfolio was in these liquidations and such – he’d borrow 10% of his assets.
I never tell people they should use borrowed money in a brokerage account. I’m also not saying I would buy Mills at this price. But, if I did buy Mills – I might look into borrowing money to offset it.
Geoff’s Initial Interest: 80%
Geoff’s Revisit Price: $21/share (down 31%)