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. 

Growth
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. 

Balance
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.

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock… and join Buffett in his quest for a veritable landslide of profits!

 

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers