Texas Pacific Land Trust - A Compounding Capital Case Study
Texas Pacific Land Trust is a land trust company which was formed in the late 1800's after the bankruptcy of its parent company, a former railroad firm. It currently owns roughly 900,000 acres of land in West Texas and as the practice of hydraulic fracking has increased the amount of reserves that are salvageable, the acreage owned by TPL has become increasingly more profitable based on the royalties they receive from the oil and gas that is drilled under their land. Essentially, it serves as a tollgate for oil and gas operators to access subsurface hydrocarbons. This is one of the oldest business models known to man.
After reading through the 10K's this week, it became clear that TPL is a wonderful illustration of how a company with high returns on capital can massively compound that capital given a long enough period of time.
A few facts on TPL (see financial spreadsheet below):
- Earnings per share grew by 28% over the last 20 years.
- They bought back an average of 2.6% of the share base annually, and a whopping 40% of shares outstanding in total over the past 20 years.
- Their stock enjoyed over 23% annualized returns over the past 25 years. To put that in perspective, if you would have invested $1,000 per year ($25,000 total) into TPL, it would be worth roughly $880,000 not including dividends. Incredible. This is the power of long-term compounding.
- They performed this well with very little to no debt.
- The most amazing stat of TPL? As of 2019, they had paid a cash dividend for 62 years straight. And they've grown it by 13% annually over the past 20 years.
It's a super boring business, but it gushes cash, manages its books conservatively, is a capital light business (average ROE of 75% over the past 18 years), and is selling at roughly 18x trailing free cash flow.
This is the textbook example of a boring business that cranks returns year after year after year. Just the way I like it.
(Disclosure: long TPL. Disclaimer: do your own research, this is not a recommendation nor investment advice)