Royal Gold, Inc (RGLD +0.43%) is a precious metals company, but it does not mine for gold or silver. What it does is called streaming, and it makes Royal Gold more like a specialty finance company that gets paid in gold and silver. I'll explain that in a little more detail, and then explain how that's helped Royal Gold create a very impressive dividend history -- one that a miner would have a hard time replicating.
Streaming vs mining
A miner looks for a location with ample gold and silver. It then builds a mine to dig the precious metals out of the ground, process them, and eventually, sell them. It's an expensive process with a lot of moving parts. Royal Gold doesn't do that. Instead, it provides miners with cash up front for the right to buy gold and silver in the future at a reduced cost. This is called streaming.
Image source: Getty Images
Streaming allows Royal Gold to avoid all of the headaches of running a mine while locking in low costs for the precious metals it eventually sells. There are a lot of benefits to this, but one of the biggest is contractually wide margins. For example, over the past decade Royal Gold's EBITDA margin has consistently been in positive territory, most of the time in the 70% area. Giant gold miner Barrick Gold's (ABX +2.20%) EBITDA margins have twice dipped deep into the red over the same span.
About that dividend
The big deal here is that Royal Gold's business model means it has ample room to pay a dividend in good years and, perhaps more important, bad -- which helps explain this streaming company's impressive 16-year streak of consecutive annual dividend hikes. I don't know of a precious metals miner that can match that run.
| Royal Gold Dividend Stats | |
| Dividend Initiated | 2000 |
| Consecutive Annual Increases | 16 |
| 3 Year Annualized Increase | 5% |
| 5 Year Annualized Increase | 16% |
| 10 Year Annualized Increase | 15% |
Data source: Dripinvesting.org.
The interesting thing about Royal Gold is that bad years for miners are actually an opportunity. When precious metals prices are weak, miners often find it difficult to raise capital from banks or through the sale of stock and bonds. Royal Gold can then step in and provide the cash that miners need to shore up their balance sheets or continue their capital programs. To give you an idea of how important this is, Royal Gold was able to increase its gold volumes 36% in fiscal 2016 because of the streaming deals it inked during the recent commodity downturn.
To be fair, dividend growth slowed during the downturn. The trailing three year annualized increase was around 5%, compared to the company's 10-year average of 15%. But that's just prudent management that helps ensure Royal Gold's long streak of annual increases stays alive.
Which brings up another important issue: Royal Gold has a solid balance sheet. Long-term debt, for example, makes up just 20% (or so) of the capital structure. The current ratio, a measure of a company's ability to pay its near-term bills, is an impressive 6.7.
Royal Gold's dividend kept moving higher even as gold prices fell. Image source: Royal Gold, Inc
These numbers will wax and wane over time as Royal Gold uses its balance sheet to ink new deals and then pays down debt with the cash flows from its streaming agreements or the issuance of stock. But the big takeaway here is that Royal Gold is a conservatively financed company. There's no particular need to worry that a heavy debt load will lead to a dividend cut.
Keeping you aboard
Royal Gold's current yield is a miserly 1.1%, so the dividend alone isn't going to make you rich here. But the steadily increasing payment will help keep you around when commodity markets are in the doldrums. And that means you'll be there to take advantage of the diversification benefits of including a little precious metals exposure in your portfolio. If you are a dividend investor, Royal Gold and its impressive dividend history should be atop your gold and silver wish list.
