With a formerly juicy dividend, song royalties group Hipgnosis (LSE: SONG) was a popular pick for some income investors. I never bought the shares so was not affected by the company’s recent announcement that the Hipgnosis dividend was suspended at least until its next financial year.
The business updated the stock market today (23 November) on its ongoing strategic review.
Options for the future
The company plans to “appoint independent advisers to conduct due diligence on its assets”.
It expects that will “provide a strong knowledge base from which the Board will commence a process of identifying and bringing forward alternative proposals for the future”.
Hipgnosis has asked its investment advisor, Hipgnosis Song Management Limited (a separate company), to propose different terms for its future business relationship with Hipgnosis.
It also announced that it plans to change auditor. On top of all that, it is currently one party on the receiving end of a legal action.
What this means for the business
Ouch!
I am glad not to own Hipgnosis shares at this point.
I do not think the news is necessarily bad. In fact, it could actually turn out to be positive. The company may get a clearer view of the value of its song portfolio. It could also end up with a more favourable financial deal with its investment advisor.
But, like many investors, one thing that I do not like is uncertainty.
All businesses involve some level of uncertainty. But the statement from Hipgnosis reeks of significant uncertainty on multiple fronts.
It remains to be seen what that means for the firm’s underlying and unusual business model of buying up song catalogues and collecting royalty payments for them.
Impact on the dividend
If that business model survives intact, or even improves thanks to a better understanding of its assets’ value or improved terms with its investment advisor, that could help cashflows at the business. That could mean not only that the Hipgnosis dividend is restored, but that it can grow compared to what it has been so far.
But there is clearly a danger of the reverse happening. The current uncertainty underlines the fact that the business model here relies on a series of assumptions about long-term asset value and likely monetization opportunities.
That is true of many businesses, such as property owners. But while their financial assumptions can be based on large data sets, Hipgnosis is a key player in a market trading in unique assets. That can make it hard to assess their real likely long-term value.
That could mean that the strategic review leads to the value and cash generation portfolio of Hipgnosis’ assets being marked down. Any such outcome might be bad news for the Hipgnosis dividend. In such a situation there is a risk it might never come back, or be restored at a lower level than before.
The shares are down 33% over five years. I think that partly reflects investor nervousness about the long-term income generation potential of the business model. The current uncertainty makes me nervous about the Hipgnosis dividend. But it could also ultimately be bad news for the share price too.
For now, I have no plans to add the shares to my portfolio.
