Franco-Nevada: For "Good and Bad Times"

06/13/2016 8:00 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

If you want exposure to the gold sector but you don't want to assume the gold miners risk, this is the stock to choose, asserts Gordon Pape, resources expert and editor of Internet Wealth Builder.

Franco-Nevada (FNV) is a royalty company in the natural resource sector, primarily gold. This means it buys a share of output of producing mines, limiting investor exposure to downside risks.

Its portfolio is mainly focused on gold, but there is some oil, silver, and other metals in the mix. The portfolio is international but the main positions are in Canada, the United States, and Latin America.

There is no such thing as a safe gold stock but Franco-Nevada's business model removes much of the downside risk from the equation.

So even when gold tumbled a couple of years ago the stock did not sell off in the way traditional gold producers did.

As well, the company shares the wealth with its investors, with annual dividend increases dating back to the initial public offering in 2007.

The company reported record revenue for the first quarter of 2016, at $132 million (Franco-Nevada reports in US dollars). That was up almost 21% from the same period a year ago.

About 95% of the revenue was sourced from precious metals (69% gold, 20% silver, and 6% platinum group metals). Over 80% was from Western Hemisphere mines.

Adjusted net income was $28 million ($0.17 per share) compared to $22.9 million ($0.15 per share) one year ago. Free cash flow provided by operating activities was $99 million, an increase of almost 43% from the year ago number of $69 million.

Franco-Nevada is debt free and uses its free cash flow to expand its portfolio and pay dividends.

With the release of the financial results, the directors approved a dividend increase of 4.8% to $0.22 a share quarterly ($0.88 a year), effective with the June payment.

It was the ninth consecutive annual dividend increase for shareholders, dating back to the time the company went public. The yield with the dividend increase is 1.3%.

Overall, Franco-Nevada outperforms the miners in good times and bad, plus there is a dividend that has steadily climbed over the years. We continue to rate the stock a buy.

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