The first thing that comes to my mind when I think about investing in precious metals is the swift and severe price swings of silver and gold. That's volatility that gets my heart pumping in a not so good way and keeps me up at night. But Royal Gold, Inc.'s (RGLD 0.78%) incredible 16 years of consecutive dividend increases soothes my nerves. And that's just one of the reasons to love the company.
The core of the business
The first thing to understand is that Royal Gold isn't a miner -- it's a streaming company. It makes money by giving cash up front to miners for the right to buy gold and silver at reduced rates in the future. Miners use the cash to shore up balance sheets and fund mine development and expansion projects. Working with a streaming company like Royal Gold is particularly beneficial when banks and capital markets aren't offering up desirable terms, like during commodity downturns.
Image source: Getty Images
To give you an example of a streaming deal, Royal Gold provided $610 million to industry giant Barrick Gold (ABX 1.34%) in 2015 in exchange for the right to buy gold and silver from the Pueblo Viejo mine in the Dominican Republic. That's one of the largest gold mines in the world. Royal Gold's cost for gold and silver is set at 30% of the spot price until a certain volume of each metal has been delivered, and 60% thereafter.
That leads to one of the first reasons I love Royal Gold -- high margins. By locking in low prices, Royal Gold's business ensures that it can survive the ups and downs of the commodity cycle in stride (and keep increasing its dividend). Just take a look at the EBITDA margins of Royal Gold and Barrick over the past decade and you'll see the difference. While margins at miners like Barrick go up and down, Royal Gold just keeps steadily moving along.
ABX EBITDA Margin (TTM) data by YCharts
That consistency is important, but it's not the only reason to love Royal Gold.
Some other lovable attributes
I've already made note of the dividend record, but it's worth repeating. Royal Gold has increased its dividend in good years and bad for 16 consecutive years. The yield is only around 1% today, but those dividend hikes can give you something to hold onto when commodity markets are in the dumps.
Also, Royal Gold's streaming model makes it something of a specialty finance company with a portfolio of mine investments. It has investments in 38 producing properties, 24 development projects, and 130 evaluation and exploration stage properties. Even the largest miners don't usually have that many projects going at one time. And that means that Royal Gold offers up a level of diversification that a miner can't, another lovable feature.
Royal Gold's dividend has kept growing despite gold's ups and downs. Image source: Royal Gold, Inc. Image source: http://s1.q4cdn.com/019733279/files/doc_presentations/2017/08/Tumazos-Conference-Aug-2017.pdf page 12
One more feature of Royal Gold's business that's worth noting is that it has a countercyclical bent. When Barrick inked that streaming deal commodity markets were in the doldrums. It needed cash to shore up its balance sheet, and other options, like banks and capital markets, weren't desirable choices. So Royal Gold was able to opportunistically build its business during a downturn, when miners were struggling to make ends meet.
A sucker for a good dividend
To be honest, what first draws my attention to Royal Gold is that gloriously consistent dividend growth in an industry that's known for volatility. But when you dig into the business just a little, you see that there's so much more to love than just the dividend, like consistently wide margins, diversification, and the ability to benefit from commodity downturns. If you are looking for gold and silver exposure, do yourself a favor and do a deep dive on Royal Gold. There's a lot to love!
