Investing in asset-light royalty companies can help shareholders generate stable dividend income at a low cost. One such TSX stock is Freehold Royalties (TSX:FRU), which offers you a tasty dividend yield of 7.4%.
Freehold Royalties manages one of the largest non-government portfolios of oil and gas royalties in Canada, with a sizeable land base south of the border. Its total land holdings consist of 6.4 million gross acres in Canada, which includes exposure to 0.9 million gross drilling acres in the United States. With interests in more than 18,000 producing wells, Freehold receives royalty income from over 380 industry operators, diversifying its portfolio and lowering overall risk.
Over the years, Freehold Royalties has focused on acquiring and managing royalties while providing a lower-risk income vehicle for investors. Similar to other royalty companies, Freehold Royalties is not exposed to costs associated with running, operating, or maintaining the oil wells. These costs are paid by operators, who also pay Freehold a percentage of the production.
Freehold Royalties went public in 1997 and has since returned 12% to shareholders, easily outpacing the broader indices. A $100 investment in Freehold’s initial public offering would be worth over $18,000 today after adjusting for dividends reinvestments. Let’s see if the TSX dividend stock is a good buy right now.
The bull case for Freehold Royalties
In 2023, Freehold Royalties reported revenue of $315 million and funds from operations of $240 million or $1.59 per share. Its dividends in the last four quarters totalled $1.08 per share, indicating a payout ratio of 68%.
Freehold Royalties ended 2023 with record leasing activity, signing 122 agreements, up 53% year over year. Further, it announced the acquisition of two royalty assets for $115 million, increasing exposure in the Midland and Delaware basins in the United States. These acquisitions should help Freehold gain traction in the U.S. while growing its Permian production by 30%.
Due to an expanding bottom line, Freehold Royalties could strengthen its balance sheet while ending the year with $123 million in long-term debt. Its long-term debt to funds from operations ratio stood at 0.5 times, which can be serviced easily.
Freehold showcased the strength of its portfolio in 2023, providing investors with exposure to a stable production base in Canada and growing oil-weighted volumes in the United States. In the last four years, the company has structurally improved its business via exposure to top-tier basins in North America. It achieved 100% organic reserves replacement in 2023, showcasing the strength of its asset base.
Is Freehold Royalties stock undervalued?
Due to a robust balance sheet and a sustainable payout ratio, Freehold aims to maintain considerable financial flexibility in 2024. It paid record dividends to shareholders in 2023 and has the potential for growth due to additional portfolio investments and third-party development of its royalty lands.
Freehold Royalties has paid shareholders a dividend every year since 1997. It has returned $35 per share or $2.1 billion in dividends to date.
Priced at 16 times forward earnings, FRU stock is quite cheap and trades at a discount of 20% to consensus price target estimates.
