Looking for a company that’s quick to pass on earnings gains to investors? Meet Freehold Royalties Ltd. (FRU-T), a fossil fuel royalties company that saw its profits shoot up as oil and natural gas prices rose.
Most companies only increase their dividend once a year (if they do so at all). Freehold has bumped its return five times in the past 12 months.
Here’s what you need to know:
Freehold Royalties Ltd.
- Current price: $12.97
- Annual payout: 72 cents
- Yield: 5.6 per cent
- Risk: Higher risk
The business: Calgary-based Freehold is a dividend-paying oil and gas royalty company with assets predominantly in Western Canada, although it is expanding in the United States. Its primary focus is to acquire and actively manage royalties, while providing a lower-risk income vehicle for shareholders. Freehold has one of the largest independently owned portfolios of royalty lands in Canada, with holdings totalling more than 6.7 million gross acres.
Royalty companies such as Freehold don’t actually own mines or oil wells. Instead, they receive royalty payments based on a share of production, either by direct purchase or by leasing mineral rights to exploration and production companies. This business model removes the risks and costs involved in finding and developing new producing assets.
The security: I recommend buying the common stock, which trades on the Toronto Stock Exchange under the symbol FRU.
Why I like it: Freehold has been quick to share its improving earnings with stakeholders. It has raised its monthly payment five times since November, 2020, and now yields 5.6 per cent.
Financial highlights: Third-quarter results showed a year-over-year revenue increase of 120 per cent, to $50.9-million from $23.1-million in the same period last year. Net income jumped to $22.7-million (17 cents a share) from $139,000 in the same quarter of 2020.
Funds from operations were up 143 per cent to $48.2-million from $19.9-million. David Spyker, Freehold’s chief executive officer, said FFO is “expected to grow materially higher with the acquisitions completed during the year.”
Total production increased by 23 per cent, to 11,365 barrels of oil equivalent per day.
The company is actively expanding its base, with several recent purchases, most of them in the United States. The latest was the closing of a deal to buy what it described as “concentrated, high quality” U.S. royalty assets in the Midland Basin of Texas/New Mexico for US$54.7-million.
Risks: As recent history has shown, this can be a volatile stock. The dividends and the share price depend heavily on the price of oil and natural gas. The company was quick to hike dividends as energy prices improved. It will lower them again just as fast if we see a price plunge.
Distribution policy: Dividends are paid monthly. On Nov. 10, the company announced a 20-per-cent jump in its payout to 6 cents a month (72 cents a year). The next payment will be on Dec. 15 to shareholders of record as of Nov. 30.
Who it’s for: This security is suitable for investors who are willing to take on above-average risk in exchange for a 5.6-per-cent yield and the potential for future dividend increases if natural gas and oil prices stay high.
Summing up: The company has turned itself around and the new emphasis on acquiring U.S.-based royalties looks promising. Obviously, this stock is not suitable if you wish to avoid fossil fuel companies.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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Gordon Pape