Published by Stansberry & Associates Investment Research.

The Greatest Unknown Investment Story on Wall Street

A million acres for 250 bucks an acre... That includes a tax-free way to grow $10,000 into over $600 million

By Dr. Steve Sjuggerud

September 2010

"Well... I don't remember ever losin' money, if we did," Roy Thomas told me on the phone this week from his office in Dallas.

Roy Thomas humbly presides over what may be the greatest unknown story on Wall Street...
It's a story of over 110 consecutive years of positive earnings – with no conceivable end to that record.
For the last 53 years, Roy's business has paid a cash dividend. In that time, it's neverreduced that dividend.
How has the business fared in the current Great Recession? No worries...
While most companies have had to freeze, cut, or halt their dividends in recent years, in today's story, the dividend has increased in each of the last seven years. In 2007 and 2008, the company brought in record earnings across its 120-plus-year existence.
This company's dividend is only a small part of the incredible investment story... For us as investors, it gets much better, as I'll explain today.
Your first questions might be, "Why haven't I heard of Roy Thomas before?" or "Why haven't I heard this story before?"
The short answer is: because nobody on Wall Street has anything to gain from this investment. You see, no brokerage firms will ever get investment banking business from this company, because it doesn't need any money. It is completely under the radar.
In this day and age, this is exactly what you and I need in our investments...
Look, in a zero percent interest world, you face the severe risk of not having enough income to live on. The "ordinary" investments out there won't work for you anymore. Cash in the bank, CDs, they're not going to cut it – not even close.
Meanwhile, that cash will have to face the ravages of inflation at some point. Printing money is the easiest way for our government to get out from under its debts – only, it's at the expense of your savings.
You need to supplement your cash income with unique investment ideas... ideas that you might not have considered in the past. You need ideas that have built-in protection from these risks, ideas that are safe, with hidden income and plenty of downside-risk protection.
We need to find ideas that other investors (or high-powered computers on Wall Street) haven't and won't ever stumble upon. These days, desperate investors are taking on way too much risk to earn just a hair more in income. Don't do that!
We have to work hard to find new ways to protect and grow our money. You can't be afraid of doing something unconventional – as long as you understand it. The "conventional" investments won't cut it now.
Fortunately, this month, we have such an investment. It really is a simple story and a simple business. By charter, the business won't change. And it could make you a lot of money, safely.
As I'll show, with some reasonable assumptions, $10,000 could turn into over $600 million – safely. Sounds absolutely impossible, right? Well, read on...
Let me start from the beginning, so you can best understand what we're getting into...

Death of a Railroad...
Birth of a Fantastic Investment

In the late 1800s, the Texas & Pacific Railroad went bankrupt.
In short, the railroad's debtholders ended up getting the railroad's land.
But what were a bunch of bondholders going to do with 3.5 million acres of land in Texas in the late 1800s? Hard to believe, but oil hadn't yet been discovered in Texas...
Who wants 3.5 million acres of Southwestern desert in 1888? How would they get rid of it?
The bondholders came up with a plan to liquidate the land in an orderly fashion: They put the land into a trust – they called it the Texas Pacific Land Trust (NYSE: TPL). The Trust has one official mission: to sell off the land over time, as offers come. The Texas Pacific Land Trust started trading on the New York Stock Exchange in 1888.
Roy Thomas is following that 1888 charter today... as have the Trustees before him through the 19th and 20th centuries.
Texas Pacific started selling its land right away after listing on the NYSE... Texas Pacific was down to about 3 million acres at the turn of the century (I'm talking 1900). Land sales continued briskly, and the Trust was down to 2 million acres by 1921.
Land sales have since slowed... a very good thing for you and me, as I'll explain. As of 1980, the total stood at 1.3 million acres. It was 1.01 million acres in 2003. And it's around 960,000 acres today.

Click the map above for a more detailed version, courtesy Texas Pacific Land Trust

If land sales have slowed, how is the Trust making big money? And what is it doing with that money? The answer to that second question in particular is what makes this opportunity irresistible to us...

Ridiculous Stealth Income:
The Unique "Trust" Structure

By charter, the Trust has to return ALL of the money it takes in (after expenses) to shareholders.
The way it returns money to you is really neat, and important. Before I explain that, let me show you how the Trust makes money.
The Trust takes in a LOT of money for basically doing nothing...
Its biggest source of cash is its perpetual oil and gas royalties from oil drilling on its West Texas lands. In short, decades ago, Texaco (among others) bought the oil rights to the Trust's lands. These companies left the Trust with a small – but perpetual – royalty on the oil taken out of the ground on the Trust's lands.
This oil royalty costs the Trust no money... It just cashes oil checks year after year. With high oil prices in 2008, the Trust cashed $13.7 million in oil and gas royalty checks. In the down year of 2009, it cashed $8.7 million in oil and gas checks.
This year has started nicely...
In the first six months alone, the Trust has already cashed $5.65 million worth of oil and gas royalty checks. In addition, in the first half of this year, it sold 1,694 acres of land for $1.9 million – an average price of $1,115 per acre.
All said and done, total sales for the Trust for the first six months of the year were $10.7 million. (The additional money comes from leasing its land for grazing and earning interest on lands it sold but holds the mortgage on.)
The Trust's profit margins are huge... Remember, this money comes in the door with very little cost to the Trust. As you might imagine, taxes are by far the biggest "cost." Profit before taxes for the first six months of 2010 was over $9 million... and taxes knocked the net income down to $6 million. Still, not a bad six months, for doing nothing.
Over the last decade, the Trust has averaged an annual net profit of about $8 million dollars a year. Remember, by charter, the Texas Pacific Land Trust must give that money back to you, in either dividends or stock buybacks.
In the last decade, the trust has bought back an average of 300,000 shares a year. At the current share price ($27), that would cost them $8.1 million this year.
These buybacks are the most important part of this story...
When the Trust buys back stock, it "retires" it. The benefit to you and me is just incredible...

The Key to the Whole Story: Turn $10,000 into $600 million... by doing absolutely nothing It's all thanks to the buyback If you buy $10,000 of Texas Pacific Land Trust today and do nothing, that investment could theoretically turn into over $600 million. Here's how... The Trust has roughly a million acres of land, and 10 million shares outstanding. It's been using the income from its oil and gas royalties to buy back (and retire) shares at a rate of 300,000 or more per year. The logical end of that, of course, is in 30 years, the Trust will be down to one share that owns all the land and is worth over $600 million. Don't sell... and you'll have that one share. Year Land Value Shares Out- standing Price per Share Acres You Control $10,000 Invested Becomes 2010 $250,000,000 10,000,000 $25 40 $10,000 2011 $257,500,000 9,666,667 $27 41 $10,655 2012 $265,225,000 9,333,333 $28 43 $11,367 2013 $273,181,750 9,000,000 $30 44 $12,141 2014 $281,377,203 8,666,667 $32 46 $12,987 2015 $289,818,519 8,333,333 $35 48 $13,911 2020 $335,979,095 6,666,667 $50 60 $20,159 2025 $389,491,854 5,000,000 $78 80 $31,159 2030 $451,527,809 3,333,333 $135 120 $54,183 2035 $523,444,482 1,666,667 $314 240 $125,627 2040 $606,815,618 1 $606,815,618 1,000,000 $606,815,618 There's no funny math here... I'm not "assuming" the price per share goes up. The share price goes up on its own because of simple math... There are fewer and fewer shares holding the company's million acres of land. The assumptions I do make are pretty reasonable: a starting land value of $250 per acre, 10 million shares outstanding and 1 million acres (in reality, it's a little less in both cases, but the ratio is about the same), a buyback of 333,333 shares a year, and a starting share price of $25. (This way, the math is easy... Your $10,000 investment gets you 400 shares, and you control 40 acres.) The only "liberty" I took was a 3% inflation rate – increasing the value of the land at 3% a year. It might not go up that fast, but the starting value of $250 per acre might be low, so it should still work out. Of course, I don't expect that, in 30 years, we'll see just one share of Texas Pacific on the NYSE, trading for $600 million a share. Instead, I expect Texas Pacific will do what it's done for its entire existence and keep splitting its stock. This doesn't harm you at all. The math above still holds true. If you never sell, your $10,000 investment should reasonably follow the path in the table above. Simply set it and forget it. This is one for the grandkids!

Each year, Texas Pacific Land Trust is buying back and "retiring" roughly 300,000 shares. Less than 10 million shares exist. So at the current rate, it's buying back and retiring roughly 3% of its shares a year. Said another way, the amount of acres you own is increasing by 3% per year.
I consider that 3% increase per year as our tax-free "stealth" dividend. You'd have to earn nearly 5% interest in a taxable account to have 3% after tax... So this 3% tax-free stealth dividend is more valuable than you might imagine.
At this rate (300,000 or more shares retired per year), the Texas Pacific Land Trust will have bought back and retired all of its shares in about 30 years. The box above shows the incredible story.
So here's what I see...

Adding Up All the Pieces:
What We'll Get for Our Money

I expect the Trust's cash dividend will increase in March (for the eighth year in a row) by one penny – to $0.21 per share. That's just under a 1% dividend yield based on the current share price... and it beats what you're earning on your cash in the bank.
Next, I expect the Trust will buy back much more than 300,000 shares over the next 12 months, since the net income from the first six months of this year was so high. That's a 3%-plus "stealth" dividend tax free to you... a 3%-plus increase in your acres of ownership... and a 3% increase in your percentage of the payout from next year's oil and gas royalties.
I expect the Trust will continue to earn oil and gas royalties indefinitely. Its other sources of money are safe, too – grazing leases, land sales, and more.
What's it all worth today? The Trust has two main pieces... oil rights and land.
Let's do a little back-of-the-napkin math...
The oil and gas royalties totaled $5.65 million for the first six months of this year. Stretch that royalty out to 12 months... that'd be about $11 million in oil and gas royalties this year. At eight times cash flow, those royalties would be worth $88 million today. (It's rough, but it's in the ballpark.)
Next up is the land... What's it worth?
We're talking nearly a million acres of West Texas desert. I looked up all the land sales the Trust has made starting in 2000. The Trust has sold 120,000 acres in the last 10 years at over $50 million total – which works out to over $417 per acre.
A guesstimate of $300 per acre seems safe if the historical pattern continues. (The pattern is low-valued land selling in the $200-per-acre range, with the occasional higher-valued "pop.")
CEO Roy Thomas doesn't offer up much of a sales pitch. "The Trust's land holdings near metropolitan areas are limited," he told me on the phone... twice. But that's good news for existing shareholders. They don't want the story to get out. They actually want the share price to stay cheap, so the buybacks can buy a whole lot more shares.
Adding it all up... roughly $300 million for the land, roughly $88 million for the oil and gas royalties, and a bit of other stuff... We're approaching a $400 million value. With roughly 10 million shares outstanding, I think the Trust is conservatively worth $40 a share.
If you bump the land value up to $400 per acre (the price received for land over the last 10 years), the Trust is worth about $50 a share. That may be optimistic. But shares are trading at about half that... around $27... as I write. (And that's down by half from their 2007 highs.)
This allows us to buy in at 1980 prices. In late 1980, the Trust sold for $30 a share. Since the Trust is in Texas and earns oil royalties, its shares track the price of oil somewhat. If oil spikes, or if inflation spikes, causing the price of oil to rise, the value of the stock will go up.

By owning land and oil rights... and having 3% of shares retired every year… we're significantly protected from the risks of government inflation. With the buyback here, it's like owning a hard asset (like gold) – that "grows" (paying us a tax-free yield). Now that's hard to find!
Remember, the only way you're going to get out-of-the-ordinary returns is to consider out-of-the-ordinary ideas – like this one. You'll beat your cash in the bank, with the cash dividend the Trust pays in March. You're buying land (for only $250 an acre), which insulates you from a falling dollar. And you'll collect oil royalties, which go up as the price of oil goes up.
I can't promise the moon here. I don't expect the share price to soar. But this is a strange case where I'd rather it didn't soar. The cheaper the stock price, the more shares the Trust can buy back with its oil royalties... which benefits us greatly.
I asked CEO Roy Thomas about the wonderful compounding machine – the buyback. Once again, he was careful with his words. He told me (twice): "Yes, what you are saying is correct. We are buying back shares at a greater rate than we are selling land."
So while a $10,000 investment might not turn into $600 million (because the company is selling land, too), the basic math is really working for you here. Texas Pacific Land Trust is a secret compounding machine.
Buy shares of Texas Pacific Land Trust (NYSE: TPL). Try not to pay more than $30 per share.
The shares are pretty thinly traded. I expect the stock will spike on this recommendation. Please keep this in mind. There's no need to chase the stock.We're in a recession, stocks are in a downtrend. This story is more than 120 years old, and it hasn't changed.
The story is out there, but nobody on Wall Street is chasing it. You don't need to chase it either... Think about what you'd be chasing... West Texas desert! No, what we want is the compounding machine.
The secret compounding machine of Texas Pacific Land Trust is probably the greatest untold investment story on Wall Street today – when, more than ever, we need super-safe ideas to grow our wealth outside of the reach of the tax man.
Buy the Texas Pacific Land Trust. Don't chase it. Try not to pay more than $30 for it. Try to buy it over the course of a few weeks, or even months.
TPL is too thinly traded to use a typical trailing stop. Also it's not a company, it's a land trust – it isn't going out of business. There is no business risk. Instead, we'll use a "time" stop. That way, if I'm wrong, we only gave up opportunity cost. For the time stop, I will remove Texas Pacific Land Trust from my recommended list in five years.
Sell half once you've made a total return of 100% (then we're riding on the house's money)


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