Image source: Silver Wheaton.
There are two major issues that you need to keep in ming when you look at Silver Wheaton Corp. (NYSE: SLW). One is that its results are tied to the ups and downs of precious metals. The second is that it isn't a miner; it's what's known as a streaming company. And for dividend investors that makes a big difference, but if you're looking at Silver Wheaton, you might find that these two streaming peers have "better" dividends.
What's streaming?
Miners make money by digging up precious metals, refining them, and then selling them. Mining, however, is incredibly expensive and risky. That's why companies such as Silver Wheaton do things a little differently. Silver Wheaton gives miners cash up front for the right to buy silver and gold in the future at reduced rates.
Miners like this because it allows them to raise cash without having to tap the capital markets or go to a bank. The money they get can be used to pay for exploration or mine development, or simply to shore up the balance sheet (something that's been particularly important recently). Silver Wheaton likes providing the money because it gets access to precious metals at cut rates. It's pretty close to a win/win.
Silver Wheaton, however, has a couple of things going on that dividend investors should be aware of. First, its dividend is variable. According to the company, "The quarterly dividend per common share will be equal to 20% of the average cash generated by operating activities in the previous four quarters divided by the Company's outstanding common shares at the time the dividend is approved, all rounded to the nearest cent." So the dividend goes up and down with the company's results rather than a fixed rate set my management.
Second, and more big picture, Silver Wheaton is currently in a tax fight with the Canadian government. Canada says Silver Wheaton has been doing its taxes wrong and owes more money, Silver Wheaton says that's not true. If Silver Wheaton loses, it will not only face back taxes and penalties, but it will also probably face a higher ongoing tax rate. That will put a damper on performance going forward and could result in less generous dividends.
Image source: Franco-Nevada.
Two alternatives
That's where Franco-Nevada Corporation (FNV +1.65%) and Royal Gold (RGLD +2.30%) come in. Both companies do similar things to Silver Wheaton, providing miners cash up front for the right to silver and gold at reduced cost in the future. How do these three stack up in terms of dividends? Silver Wheaton's yield is about 1.2%. Franco-Nevada's is about 1.4%, and Royal Gold's is a touch over 1.8%. So each offers more income than Silver Wheaton today, but there's more to this story.
For example, Franco-Nevada does a little more than just precious metals. It has a small amount of exposure to oil and gas drilling and "other minerals." These two made up a little under 9% of the company's revenues in fiscal 2015. Right now, oil and gas might be seen as a liability, but having exposure beyond precious metals provides a bit of diversification to Franco-Nevada's business.
Image source: Royal Gold.
Then there's the not-so-subtle issue that 2015 marks the eight consecutive year of annual dividend increases at Franco-Nevada. Silver Wheaton's dividend has been declining for a couple of years now. If you like diversification and consistency, Franco-Nevada might be a better option for you.
Royal Gold, meanwhile, has an even more impressive record of annual dividend increases. Its dividend has been increased every year since 2001, a 15-year run. That said, Royal Gold, like Silver Wheaton, is focused on precious metals, so it doesn't have the diversification of Franco-Nevada. But it has the highest yield of this trio and the longest history of annual increases. So there's a lot for dividend investors to like.
Growth opportunity
Now happens to be a great time to look at streaming companies. That's because the deep and prolonged downturn in commodity prices has left miners weak and, more important, desperate for cash. Silver Wheaton, Franco-Nevada, and Royal Gold have all been happy to oblige and provide that money.
And that brings us to a third differentiating factor. Streaming companies generally use short-term debt of some sort to fund streaming deals. They then issue shares to pay back the debt. Silver Wheaton, however, recently announced a share buyback, shifting the historical model it's used. That brings up questions about future growth, even though it remains a good time to ink new deals.
Franco-Nevada, on the other hand, just sold stock to pay for a deal with troubled Glencore. It went in looking to raise around $550 million, enough to cover the deal, but was able to raise over $900 million because of investor demand. Royal Gold hasn't tapped the public markets in some time, but it hasn't announced a share buyback, either. So there's every reason to believe that it's business as usual for this miner, too.
In the end, Silver Wheaton is a good company, and investors would probably be just fine owning it. But, like all companies, it isn't perfect. If you're in the market for a streaming company Franco-Nevada and Royal Gold both offer higher dividends, they allow you to avoid the tax risk hanging over Silver Wheaton today, and each looks like it's still taking advantage of the precious-metals downturn -- something that Silver Wheaton's decision to buy back stock might hamper. And don't forget the long histories of annual dividend increases, either. If you're looking at Silver Wheaton for income, you might find that these two streaming competitors have better dividends.
