Investing in dividend stocks can help you earn a steady stream of recurring income. Investors should understand that dividend payouts are not guaranteed, which makes it crucial to identify companies that can maintain these payments across market cycles.
One such TSX stock that offers shareholders a tasty dividend yield is Freehold Royalties (TSX:FRU). Valued at a market cap of $2.1 billion, Freehold Royalties offers you a dividend yield of 7.6%.
Is Freehold Royalties stock a good buy right now?
Freehold Royalties manages one of the largest non-government portfolios of oil and natural gas royalties in Canada. It also has a sizeable land base in the U.S., which positions Freehold as a leading energy royalty company in North America.
Its total land holdings encompass 6.4 million gross acres in Canada and 0.9 million gross drilling acres south of the border. The company primarily aims to acquire and manage royalties while providing a lower-risk income vehicle for shareholders.
As a royalty owner, Freehold does not pay any of the capital costs required to drill and equip oil and natural gas wells for production. It also does not incur costs to operate the wells or maintain production. In fact, the operators pay these costs while Freehold receives a percentage of the total production.
Freehold Royalties generates 60% of sales from Canada and 40% from the United States. Due to its asset-light business model, Freehold enjoys higher profit margins, allowing it to pay shareholders a dividend yield of 7.64%.
In the second quarter (Q2) of 2023, Freehold Royalties increased volumes by 9% year over year, as its production average stood at 14,667 barrels of oil equivalent per day. These volumes were in line with estimates and are forecast to ramp up in the second half of 2023.
What is the target price for this TSX stock?
As West Texas Intermediate crude oil prices fell 32% year over year in Q2 of 2023, Freehold’s funds from operations fell 37% to $53 million. Comparatively, it ended Q2 with a net debt of $131 million, an increase of almost 300% compared to the year-ago period.
Due to lower fund flows, the company’s dividend payout ratio rose to 77% in Q2, up from 43% in the year-ago period.
Freehold Royalties pays shareholders a monthly dividend of $0.09 per share. It is forecast to end 2023 with funds from operations between $250 million and $280 million. Given its annual dividend of $1.08 per share, Freehold’s payout ratio for 2023 stands at 61%, providing it with the flexibility to lower balance sheet debt, raise dividends, and acquire other cash-generating assets.
Freehold Royalties increased its monthly dividends by 12% year over year in Q2. In fact, its dividends have grown by 500% from the COVID-19 commodity price lows. The company expects to maintain a payout ratio of 60%, which is sustainable.
Moreover, its net debt-to-funds flow ratio is below 0.5 times as Freehold aims to maintain over $100 million in financial capacity. Its net debt increase reflects the acquisitions completed in the past year, which should drive future cash flows higher.
Priced at 13.5 times 2024 earnings, Freehold Royalties stock trades at a discount of 37% to consensus price target estimates.
