Does Pan American Silver Measure up to Silver Wheaton?

There are many silver related investments to consider including Silver Wheaton and Pan American Silver. Let’s examine the relative strength of each company.

May 25, 2014 at 9:16AM

The silver market has been weak in recent months, as the price of silver has stalled between $19 and $22 per ounce. Nonetheless, investors who believe the silver market is bound to recover in the near future could consider silver investments. Two leading companies in the silver market are Silver Wheaton (NYSE:SLW) and Pan American Silver (NASDAQ:PAAS). Let's take a closer look at these companies and examine their relative strong points and weakness.

First of all, even though Silver Wheaton and Pan American Silver are in the silver business, they are very different companies: Silver Wheaton is the world's leading silver streaming company. Conversely, Pan American Silver is a precious metals producer (mostly silver). Nonetheless, both companies offer a good opportunity for investors who wish to increase their exposure to silver. Moreover, according to these companies' 2014 guidance, their respective silver sales account for roughly 73% to 74% of their total precious metals sales. This means both companies have a similar exposure to silver. 

In 2014 Silver Wheaton doesn't expect to increase its gold and silver sales (in ounces). According to the company's annual guidance, its silver sales (equivalent ounces) are projected to rise by only 0.5% to 36 million ounces.

Pan American Silver doesn't expect to show a much higher growth rate in its operations in 2014; its silver and gold sales are expected to increase by only 2.5% year over year. So neither company offers much growth. Let's turn to their balance sheet and their financial risk. 

The balance sheet of Pan American Silver is one of the company's advantages with close to $400 million in cash and short-term investments, total debt of $65 million, and a debt-to-equity ratio of only 3%. The financial risk of the company is relatively low. Moreover, the company was able to reach an operating cash flow of $36 -- 12% higher than in the first quarter in 2013.

Silver Wheaton is also doing well, but the company is a bit riskier than Pan American Silver from a balance sheet perspective: Its cash and short-term investments are low at $82 million, its debt is around $1 billion, and the company's debt-to-equity ratio is 30%. Further, its operating cash flow dropped by 30% mainly due to low precious metals prices. Nevertheless, Silver Wheaton's financial situation isn't dire and its financial risk isn't high.

Profitability and dividend
Silver Wheaton's profitability is much higher than Pan American Silver's, because the former is a silver streaming company while the latter is a silver producer. In the first quarter of 2014, Silver Wheaton's operating margin was 49%. Moreover, its operating cash flow to net sales ratio was 69%. In comparison, Pan American Silver's first quarter profitability was only 15% and its operating cash flow to net sales ratio was 17%.

Despite the higher profitability of Silver Wheaton, Pan American Silver pays a hefty annual dividend yield of 3.75%; Silver Wheaton's dividend yield is only 1.3%. The reason for this difference is because Silver Wheaton tied its quarterly dividend payment to its operating cash flow -- as the operating cash flow drops the company's dividend diminishes. Conversely, Pan American Silver doesn't link its dividend payment to its cash flow operating, which allows the company to maintain its high dividend.

Over the long term, however, Silver Wheaton's policy is a better one for the company as it doesn't have to take a loan, reduce its cash on hand, or cut down its capex in order to maintain its dividend payment.

Foolish bottom line
Silver Wheaton and Pan American Silver are both strong companies and have their own relative advantages. Pan American Silver pays a higher dividend yield and has a stronger balance sheet. Silver Wheaton is much more profitable and is more able to turn its sales into cash due to its type of business. I think that over the long run Silver Wheaton has a better business plan, which is less risky and offers higher returns.

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Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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