Franco-Nevada (TSX: FNV)(NYSE: FNV) is primarily a gold royalty and streaming company with a large and diversified portfolio of assets. Royalties are ongoing economic interests in the production or future production from a property, while streams are metal purchase agreements that provide, in exchange for an upfront deposit, the right to purchase all or a portion of one or more metals produced from a mine at a pre-set price.
Because the company doesn’t operate any mines, develop projects, or perform exploration, it is a low-risk business in the typically high-risk and unpredictable metals and mining sector. Franco-Nevada’s robust business is characterized by stability and high margins.
“Our investment objective is to increase our net asset value and cash flow per share, not just to make the company larger.”
Franco-Nevada 2022 Asset Handbook
The stock has outperformed the market and the industry in the long run. Below are the five- and 10-year total-return graphs.
FNV, XIU, RING Total Return Level data by YCharts
FNV, XIU, RING Total Return Level data by YCharts
An overview of Franco-Nevada’s portfolio
Franco-Nevada has a large and diversified portfolio of royalties and streams. They’re diversified by asset, operator, geography, and commodity. Only one of its assets and operators contributes greater than 10% (specifically, 18%) of its revenues.
Geographically, it generates 35% of revenues from Canada and the U.S., 32% from South America, and 24% from Central America and Mexico. Commodity-wise, it generates 58% of revenues from gold, 13% from silver, 6% from platinum group metals, and 23% from diversified assets, including iron ore and energy assets. The above was its 2021 diversification.
Franco-Nevada stock Q1 2022 results
Franco-Nevada reported its first-quarter (Q1) 2022 financial results yesterday. The company maintains a super-strong balance sheet. It essentially has no long-term debt. Its debt-to-asset and debt-to-equity ratios are only approximately 3%. Moreover, its cash and cash equivalents of US$722.7 million increased from 8.7% of total assets in Q1 2021 to 11.3% in Q1 2022.
Here are some highlights of the Q1 2022 results:
- Revenue rose by 10% to US$338.8 million
- Net income increased by 6% to US$182.0 million
- Adjusted net income jumped 10% to US$177.2 million
- Adjusted earnings per share increased by about 11% to US$0.93
- Adjusted EBITDA, a cash flow proxy, improved by 9% to US$286.6 million
- Adjusted EBITDA per share also increased by 9% to US$1.50
- This resulted in an adjusted EBITDA margin of 84.6%, down negligibly by 0.40% year over year
Valuation and dividend
Because of the defensiveness of the business and its ability to stay profitable through economic cycles, Franco-Nevada commands a premium valuation. However, the stock will still more or less move with the volatility of the underlying commodities. Particularly, the stock price will be swayed the most by the changes in the spot gold price.
Currently, analysts think the stock is fairly valued. FNV stock yields only about 0.8%, but it has increased its dividend every year since 2008 with a 10-year dividend-growth rate of 11.5%. Its payout ratio is estimated to be sustainable at about 33% of earnings this year.
Foolish investor takeaway
Franco-Nevada stock has delivered market- and industry-beating returns in the long run. It appears to be a hold at current levels.
