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Franco Nev Corp(FNV-N)

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Oil Prices and 1 Customer Are Taking a Toll on This Dividend Stock. Is It a Buy?

Motley Fool - Sat Dec 16, 2023

Franco-Nevada(NYSE: FNV) is, at its core, a precious metals company. But it is not a miner; it is a streaming and royalty company, which means it provides cash up front to miners in exchange for the right to buy gold and silver in the future at advantaged prices. For more conservative investors, it is a good way to add precious metals to a portfolio for diversification purposes. Sixteen consecutive annual dividend increases prove that. But there are some nuances to consider here, and oil is a fundamental factor to keep in mind.

Franco-Nevada is lagging behind its peers

If you are looking at Franco-Nevada, you'll also find Royal Gold(NASDAQ: RGLD) and Wheaton Precious Metals(NYSE: WPM) interesting. These are the three largest companies in the streaming space. As the graphic below shows, Franco-Nevada has been a notable laggard of late, even as gold has been near record highs.

FNV Chart

FNV data by YCharts.

This is what makes Franco-Nevada so interesting right now. Adding to the attractiveness is the company's 1.3% dividend yield. On an absolute level, that's tiny, but the purpose of this stock in a portfolio is really about adding diversification. The yield and the 16 years of annual dividend growth are icing on the cake for conservative income-focused investors. The yield, however, is the highest it has been in five years. It has also closed a gap that existed between Franco-Nevada, Royal Gold, and Wheaton. That suggests that Franco-Nevada is no longer being afforded a premium valuation.

FNV Dividend Yield Chart

FNV Dividend Yield data by YCharts.

If you are looking at the spike in gold and trying to find a way to invest in the space while generating a reliable stream of income, Franco-Nevada could be an attractive way to get that done.

Franco-Nevada is a bit different

There are a couple of reasons for Franco-Nevada's laggard performance. The first is a big-picture difference between this company and its closest peers. In addition to gold and silver streaming, Franco-Nevada also invests in energy projects using a similar business model. In total, energy made up around 17% of the company's revenue in the third quarter, so it isn't the most important part of the business, but it isn't inconsequential, either. Oil prices wax and wane over time, and they were down year over year in the quarter. So, this business has been a drag on performance of late.

Brent Crude Oil Spot Price Chart

Brent Crude Oil Spot Price data by YCharts.

The important thing to remember is that adding energy wasn't an accident. Franco-Nevada was purposefully looking to increase the diversification of its portfolio to help smooth out performance over the long term. Right now, oil is a relative headwind, but that hasn't always been the case. The two commodities often move in very different ways. For investors who place an emphasis on portfolio diversification, this will probably be a positive selling point.

The other big problem right now is Cobre Panama, a mine operated by First Quantum that accounts for 22% of Franco-Nevada's revenue. The mine has effectively been shut down because of social and legal issues. That has put material pressure on Franco-Nevada's stock price, even though that mine has historically been a good investment.

The company believes a worst-case scenario outcome, in which the miner has to go to arbitration to enforce its rights, would work out in favor of the miner, which is how similar situations have turned out in the past. While this is a notable issue right now, Franco-Nevada does not view it as a material long-term issue. However, taken together with the energy headwinds, it is helping to materially depress the stock price.

Taking a little risk with Franco-Nevada

Franco-Nevada is definitely not a risk-free investment, given that it generates revenues from volatile commodities like gold, silver, oil, and natural gas. However, it has a long history of rewarding investors well while navigating the inherent volatility of the precious metals and energy sectors. Right now, there is more uncertainty than usual thanks to the issues at the Cobre Panama mine. History suggests Franco-Nevada will weather the situation in stride. Given the stock's underperformance relative to peers, now could be a good time for dividend investors who think in decades to do a deep dive.

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Reuben Gregg Brewer has positions in Franco-Nevada. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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