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Why Shares of Franco-Nevada Rose 35% in the First Half of 2020

By Scott Levine – Jul 5, 2020 at 3:10PM

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Shares of this gold stock look more lustrous now than when the year began.

What happened

Proclaiming itself as the "gold investment that works," Franco-Nevada (FNV -2.90%) proved that its branding was well warranted over the past six months. While the S&P 500 has ticked down 4% in the first half of the year, shares of Franco-Nevada have climbed 35%, according to data from S&P Global Market Intelligence. In addition to the rise in the price of gold, the company's strong first-quarter earnings report and dedication to its dividend have inspired investors to pick up shares.

So what

Unlike mining companies that dig the yellow stuff out of the ground, Franco-Nevada operates more like a specialized financier. The company provides up-front capital to the mining companies, and in return, it obtains the right to purchase a certain amount of gold (or other metal) at a previously determined discounted price, or to receive a percentage of mineral production from a mine.

Rows of gold bars.

Image source: Getty Images.

While the company's portfolio includes silver, platinum group metals, and oil and gas assets, it's gold that figures most prominently, representing 65% of revenue and 63% of adjusted EBITDA in 2019. It's no wonder, therefore, that investors turned to the stock as the price of gold climbed 15.4% during the first six months of the year.

Another factor that encouraged investors was the company's Q1 report. Reporting revenue of $240.5 million, Franco-Nevada recognized a year-over-year increase of 34% on the top line. The bottom line also glittered brightly in investors' eyes as the company reported adjusted EBITDA of $192.7 million, a 37% increase over the same period in 2019. And it wasn't only the income statement that investors found alluring; Franco-Nevada also shined in terms of cash flow, reporting operating cash flow of $195.2 million -- 36% higher than its $143.6 million from Q1 2019.

Lastly, Franco-Nevada distinguished itself among investors in terms of its commitment to its dividend. While the COVID-19 outbreak forced many companies to cut or suspend their quarterly dividends, Franco-Nevada continued to reward shareholders. In May, management announced that the company would be raising the quarterly dividend to $0.26 per share, a 4% increase over the previous amount.

Now what

Although Franco-Nevada has withdrawn 2020 guidance because of the uncertainty stemming from the global pandemic, the company's debt-free balance sheet suggests that it's well-suited to withstand the near-term headwinds. In fact, for those looking to increase their exposure to gold, Franco-Nevada represents one of the best investment opportunities at the moment.

Scott Levine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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