Upside for This Gold Stock?
Franco Nevada Corp (NYSE:FNV, TSE:FNV)—one of my favorite gold stocks—made an important announcement earlier this month. Needless to say, it received little attention from the mainstream press.
On May 4, Franco-Nevada management increased the size of the stock’s quarterly dividend by 4.8% to $0.22 per share. Executives attributed the dividend increase to the company’s recent investments in its Antamina and Antapaccay mining projects. For shareholders, the recent dividend increase was the ninth in a row since the company went public in 2007. (Source: “Franco-Nevada Reports Strong Q1 2016 Results and Increases Quarterly Dividend,” Franco Nevada Corp, May 4, 2016.)
The story is a big deal given the state of the mining industry. Under the weight of low commodity prices, most miners are cutting dividends and dialing back operations. Franco-Nevada’s move to increase its payout to shareholders is a sign of remarkable strength.
This could be just the beginning.
Franco-Nevada is one of my favorite gold stocks because it is defensive. It’s a royalty company that focuses on financing the actual miners that absorb almost all of the operational risks.
Basically, Franco-Nevada finances miners through streaming contracts. In return, Franco-Nevada gets a share of the funded companies’ mining production.
Under a streaming contract, Franco-Nevada is able to buy a miner’s gold or silver production at a steep discount to the market price. This allows the company to invest in a new mining project but skip much of the heavy lifting and risks that mining often implies.
Franco-Nevada invests to participate in developing mines in exchange for royalties or percentages of what such mines produce. This translates into gains even when gold prices are depressed and superior dividend performance.
This skillful financial management has turned into big profits for FNV stock shareholders. Since the company’s initial public offering in 2007, the Franco-Nevada stock has quadrupled in value. The company has managed to absorb the shocks from volatile gold prices and grow steadily unlike many of its peers.
Source: Franco-Nevada Investor Presentation
More gains could be coming. Franco-Nevada has more than $136 million in cash sitting on its balance sheet. This strong position gives it the leverage to expand its asset portfolio, increasing revenue and sustaining its aggressive dividend policy.
A winning business model, tidy shareholder returns, and growing dividends: the mainstream press better sit up and take notice. Franco-Nevada could be the top gold stock for 2016 and beyond.