Should I buy Hipgnosis stock or shares in Round Hill Music?

Hipgnosis Songs and Round Hill Music are two investment trusts offering me exposure to song royalties. I just have to decide which stock I want to buy.

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I have been looking for a dividend-paying stock to buy for my Stocks and Shares ISA portfolio. Hipgnosis Songs (LSE: SONG) and Round Hill Music (LSE: RHM) have both caught my eye. The pair are investment trusts that each own a portfolio of copyrights to songs and collect royalties for licensed use. The question is, which stock should I buy?

Going for a song

There are more comprehensive summaries of how music royalties work, but basically, copyright owners licence others to perform, stream, insert into video games and adverts and sell physical copies of their song in exchange for royalty payments. The holder of a portfolio of copyrights thus faces a couple of challenges. One is to get the songs played or performed. The second is to collect the royalties. Piracy is a risk to both companies. There is also the worry that music licensors get larger and use their power to reduce the payments made to copyright holders.

Round Hill, I think, has the edge here. Its team has run a song royalties business for a decade. However, Hipgnosis is no slouch, as its management team includes former music industry insiders.

Tracking performance

Round Hill is buying out the copyright catalogue of a private equity fund — owned and managed by the same parent company — that has reached the end of its life, in two tranches. The first tranche was completed in February 2021 at the cost of $282m. The second purchase is expected to finalise in June 2021 and would exhaust the funds raised so far.

Although private equity assets are independently valued, related-party transactions always make me uneasy. The fund has provided annual revenue numbers for the first tranche of investments from its private equity fund. But there are no operating numbers for the private fund or Round Hill, which has just started.

On the other hand, Hipgnosis has a couple of years of financial data and has built its portfolio from scratch. I will ignore the 800% revenue growth, as Hipgnosis is only a couple of years old and building its portfolio. What is impressive are the net income margins of 33% for 2019 and 39% for 2020. And Hipgnosis has already paid dividends and yields somewhere between 4.2% and 4.4%.

Hipgnosis stock is a buy for me

Almost half of Hipgnosis’s current portfolio is pop music, and the majority of songs were penned within the last 10 years, but there are many contemporary classics in there. According to my calculations, Round Hills portfolio is more focused on rock and country (60% combined) and mature. Although the portfolios are converging, Round Hill’s does tilt towards the timeless classics, with Hipgnosis offering a more contemporary feel.

Song popularity peaks and declines sharply in most cases, and so do the royalty flows. More of Round Hill’s portfolio is likely to be past the peak compared to Hipgnosis’s. However, Hipgnosis’s portfolio is getting less pop-centric and older, suggesting it is building a firmer revenue base.

I favour more financial clarity over less, which, together with the portfolio convergence, makes the Hipgnosis stock a buy for me. Of course, I have the option to take another look at the pair once Round Hill can provide some performance figures.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James J. McCombie owns shares in Hipgnosis Songs Fund. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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