I have been watching Franco-Nevada Corporation (FNV 0.98%) for several years. Although I'm also fond of streaming and royalty peers Royal Gold (RGLD -1.09%) and Wheaton Precious Metals (NYSE: WPM), I long ago decided that, when I pulled the trigger, it would be Franco-Nevada that I added to my portfolio. Here's why I chose to buy Franco-Nevada, and why now.
1. Fear
Franco-Nevada is, at its core, a gold investment. Gold is an asset investors tend to buy when they are looking for a safe haven in a storm. Essentially, when you are worried that a market decline is going to wipe out your wealth, you buy gold-related stocks.
Image source: Getty Images.
To be fair, I'm not exactly worried about my portfolio. I own a lot of large, financially strong companies that have weathered market storms in stride throughout their very long histories. I'd view a market drop as an opportunity to put some of my idle cash to work and simply add to many of my existing positions. However, that doesn't mean a market drop wouldn't hurt. With the U.S. expansion getting long in the tooth and signs of trouble on the world stage, including the U.S. trade war with China and slowing growth in Europe, I think the next recession is moving closer to reality. Owning Franco-Nevada should help soften the blow of any recession-led stock declines.
2. No gold bullion please
While I wanted to get a little gold exposure in my portfolio, I didn't want to own gold. A direct investment in gold has limitations that make it undesirable to me. For example, an ounce of gold is an ounce of gold -- there's no potential for that ounce to produce any growth. The only upside available is from an increase in the price of gold. That's a very one-dimensional investment, and I'd rather have more options.
3. Miners are OK, but not great
I'm also not overly fond of gold miners. While a miner is a business tied to gold, allowing for the company to grow over time, building and operating a mine is an expensive, time-consuming, and complicated business. There are a lot of risks in the mining business, and I'm big on avoiding risk. Notably, miners have a history of overbuilding during gold rallies, which just feeds into the highly cyclical nature of the mining industry. That's not something I want to put in my portfolio.
4. A different way to own gold
Franco-Nevada's streaming and royalty focus is a much better approach to the precious metals and mining space, in my view. The company provides cash up front to miners in exchange for the right to buy gold at contractually reduced rates in the future. Downturns in the gold market are actually huge opportunities for streaming companies because that's when miners are most desperate for the cash a company like Franco-Nevada provides. And while investment opportunities may dry up when gold spot prices rise, Franco-Nevada will still benefit since it rides the increases in the price of gold just like miners.
I expect Franco-Nevada's price to lag behind gold miners in a gold rally, but I'd also expect less downside when gold is faltering. That's a trade-off I'm willing to make, and it's one that, so far, has proven to be a pretty good long-term deal for Franco-Nevada shareholders.
5. Dividends
Franco-Nevada's 1.4% yield isn't much to write home about, but the dividend has been increased each year for 11 years running. No gold miner that I'm aware of can claim that. And you'll never get a dividend from a direct investment in physical gold. Since I'm fond of dividends, Franco-Nevada's commitment to returning value to shareholders was important to me.
That said, I could have added more yield to my portfolio via Wheaton Precious Metals, a streaming peer that has a dividend yield of nearly 1.9%. The problem with Wheaton is that it has a variable distribution policy tied to its financial results. So, in effect, the dividend payment goes up and down with the price of precious metals. I'd prefer something a little more consistent, even if it means accepting a lower yield today.
6. Diversification
Wheaton was out as an alternative, but what about streaming peer Royal Gold? Franco-Nevada has a more diversified portfolio than Royal Gold, and it spans multiple dimensions. However the top-line number tells you a lot: Franco-Nevada's portfolio contains 377 assets, Royal Gold's portfolio has 191 investments, and for reference, Wheaton only has 28 investments. Each company has a slightly different approach, so there are reasons for the portfolio differences. However, I prefer the broader diversification built into Franco-Nevada's portfolio. For me, that gave it the edge over Royal Gold.
7. Oil and natural gas
One of the biggest differences on the diversification front is that Franco-Nevada has exposure to the energy space. Neither Royal Gold nor Wheaton have any exposure to oil and natural gas. This means Franco-Nevada is not a pure play on precious metals. I like that, and 2018 shows why it's so important. Gold prices were relatively weak last year, and Franco-Nevada experienced a temporary reduction in production at the Candelaria mine, a key investment.
FNV Revenue (Quarterly) data by YCharts.
The end result was that quarterly revenue from the precious metals side of the business fell notably in the second and third quarters. For example, revenue from precious metals declined 8% year over year in the third quarter alone. However, Franco-Nevada has been ramping up its energy investment, with revenue roughy doubling over the last year or so to $26 million. That, in turn, allowed the company to keep quarterly revenue in the $170 million range throughout the period despite weakness on the gold side of the business. The company basically uses the same business model in energy as it does in gold. I like diversification, and this is a prime example of why.
8. A catalyst
The last reason I went with Franco-Nevada was more of a timing issue. Not only am I concerned about the current global economic condition, but the streaming company is expecting a big investment, Cobre Panama, to come on line in 2019. That, coupled with a return to normal production at Candelaria suggest that Franco-Nevada's business has some upside from increased gold production, even if gold prices remain weak. Franco-Nevada estimates that the increased production from these two investments, along with progress at other investments, will help to keep the company's overall production growing through 2022. So, after a tough year, it looks like Franco-Nevada has some good news on tap in 2019 and beyond.
The best of the lot
There is no perfect investment, and attributes I see as positives at Franco-Nevada might be viewed as negatives by another investor. However, with the global economy looking increasingly weak and the stock market still near all-time highs, I'm happy to add a little precious metals exposure to my portfolio. Franco-Nevada, meanwhile, allows me to do so in a way that appeases my dividend focus and my preference for safety (via its diversified approach). It was an easy call for me to go with Franco-Nevada, a stock I hope to own for a very long time.
Check out the latest Royal Gold and Wheaton Precious Metals earnings call transcripts.
