Many investors use gold as a hedge against inflation. Because of that, it has become a hot commodity in recent years as fears of inflation have increased due to all the economic stimulus pumped into the global economy to keep it running during the pandemic.
With inflation running at its hottest level in nearly 40 years last year, we asked three Fool contributors for their favorite ways to invest in gold. Here's why they think Franco-Nevada(NYSE: FNV), Wheaton Precious Metals (NYSE: WPM), and Agnico Eagle Mines (NYSE: AEM) are the best gold stocks.
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Gold and a little bit more
Reuben Gregg Brewer (Franco-Nevada): I'm not a huge fan of precious metals miners because the basic business model tends to be fairly volatile, driven largely by commodity price swings. However, streaming and royalty companies like Franco-Nevada take a different approach to the space that helps to smooth out the ride while still providing exposure to gold and silver. Streamers pay miners up front for the right to buy precious metals at reduced rates in the future. Miners use the cash to build new mines, expand existing ones, make acquisitions, or simply to spruce up their balance sheets. Franco-Nevada gets to lock in low prices and, thus, tends to have generous margins in both up markets and down ones.
FNV Gross Profit Margin data by YCharts
Royal Gold and Wheaton Precious Metals basically do the same thing, so Franco-Nevada is not unique on this front. What sets it apart is that Franco-Nevada also has a bit of exposure to energy markets (15% of revenue) via deals similar to those it inks for metals. While that means it isn't a pure-play precious metals stock, I think the diversification adds a material benefit given the commodity nature of the business. The proof of the success here is in the company's dividend, which has been increased annually for 14 consecutive years despite the inherent volatility of the precious metals sector.
Franco-Nevada isn't exactly cheap today, with a historically low dividend yield of 0.9%. However, if you are conservative like me and still looking for a gold stock, this diversified play on the space is one you should strongly consider.
A high-margin gold stock
Matt DiLallo (Wheaton Precious Metals): Wheaton is a precious metal streaming company. It pays mining companies an up-front fee to help them finance development and expansion projects. It receives the right to purchase a portion of that mine's production at a fixed price in exchange.
The company's various streaming contracts enable it to purchase gold at an average price of $451 an ounce through 2025. With gold recently trading at more than $1,840 an ounce, Wheaton Precious Metals is making a lot of money.
For example, in the third quarter, the company had an average cash cost of $410 per gold equivalent ounce. Given where precious metals prices were in the quarter, its cash operating margin was $1,354 per gold equivalent ounce. That enabled it to produce more than $200 million of operating cash flow during the quarter on $269 million of revenue and a record $923 million of cash flow during the first nine months.
Wheaton uses its cash flow to pay a dividend -- it pays out 30% of its average operating cash flow over the last four quarters -- and invest in new streams. Thanks to higher precious metals prices, Wheaton has been able to pay a growing dividend, increasing it by 25% over the past year. It has also signed several new streaming deals, which should supply it with a growing cash flow stream in the future.
Wheaton's streaming model has enabled it to consistently outperform the price of gold and gold mining stocks over the years. That winning track record should continue, which is why it remains my favorite way to invest in gold.
Don't miss this upcoming mega-gold merger
Neha Chamaria(Agnico Eagle Mines): One of the few gold mining stocks I have on my radar right now is Agnico Eagle Mines as the company sets itself up for growth, backed by a mega-merger. Agnico Eagle Mines is about to acquire Kirkland Lake Gold in what it calls a merger of equals, with the former set to own 54% stake in the combined company.
Here's why this merger is a big deal for Agnico Eagle Mines: Kirkland Lake Gold is not only one of the most cost-efficient gold mining companies, but is also a debt-free and free-cash-flow-positive gold miner. That's one of the most impressive company profiles you could find in the precious metals industry. Moreover, Kirkland Lake is also on solid footing when it comes to production. On Jan. 17, the miner beat its own estimates and reported record production for its fourth quarter. Kirkland lake also ended the year with $940 million in cash and no debt.
Agnico Eagle Mines, therefore, is on track to become Canada's largest and one of the lowest-cost gold producers after the merger that's expected to close in the first quarter of 2022. In fact, Kirkland Lake's strong financial profile could also mean larger dividends for shareholders in Agnico Eagle. So far, Agnico Eagle has paid a dividend every year since 1983 and has grown dividends at a solid compound annual rate of 20% since 2010. All in, Agnico Eagle looks like one of the most compelling gold stocks for 2022 and beyond.
10 stocks we like better than Franco-Nevada
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Matthew DiLallo has no position in any of the stocks mentioned. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer owns Franco-Nevada. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
