Royalty companies on the TSX are a hidden gem for investors looking for steady income with lower risk. These companies don’t get their hands dirty in operations but instead earn revenue by taking a percentage of the sales from resource extraction, like gold or oil. This means the companies benefit from high commodity prices without the hefty costs of exploration and production.
Plus, these often enjoy strong cash flows and pay out attractive dividends. This makes the stocks a solid choice for those who want to invest in the resource sector without the rollercoaster ride of direct ownership. Today, let’s get into one strong dividend payer in particular.
Freehold Royalties
Freehold Royalties (TSX:FRU) earns revenue by owning the land and collecting royalties from energy companies that extract resources from their properties. It’s a smart and efficient business model because the company doesn’t have to worry about the operational risks or costs of extraction. It simply sits back and collects a share of the profits. This makes it a stable and attractive option for investors seeking exposure to the energy sector.
One of the great things about Freehold is its diversified portfolio. It owns land across various prolific oil and gas regions in North America, which spreads out its risk. So, even if one area experiences a downturn, others might still be thriving. This geographic diversification, combined with a mix of different royalty streams from oil, gas, and natural gas liquids, helps to smooth out the revenue fluctuations that can plague other companies in the energy sector.
Investors also appreciate Freehold for its commitment to returning value to shareholders. The company has a history of paying out substantial dividends, which is music to the ears of income-focused investors. With its low-risk business model, strong cash flows, and focus on shareholder returns, Freehold Royalties offers a reliable way to gain exposure to the energy sector without getting your hands too dirty.
Into earnings
Freehold recently announced impressive second-quarter results that had investors smiling, leading to a nice jump in its stock price. The company reported $84 million in revenue, a 14% increase from the previous quarter. This was thanks to higher oil prices and increased production. Notably, its United States operations saw a 9% boost in production, driven by new wells coming online in the Permian basin.
Another reason for the share price surge is the company’s solid financial management. Freehold generated $60 million in funds from operations, translating to $0.40 per share, up 10% from the previous quarter. This robust cash flow allowed them to maintain their attractive dividend of $0.27 per share, with a stable payout ratio of 68%.
Lastly, Freehold’s strategic acquisitions in the U.S. and Canada further fuelled optimism. It completed $7.5 million in acquisitions, focusing on high-quality royalty assets, boosting future production and cash flow. With the company reducing its net debt by $11.4 million and maintaining a strong balance sheet, investors saw this as a signal that Freehold is well-positioned for continued growth. All these factors combined led to the recent jump in FRU stock, reflecting investor confidence in the company’s ongoing success.
Bottom line
Freehold still holds significant value on the TSX today, especially for investors who appreciate steady income with a solid yield. With a forward annual dividend yield of 8.02% as of writing, FRU offers a compelling income stream. The company’s strong operating margins and consistent cash flow generation underscore its ability to maintain these dividends, even in fluctuating commodity markets.
However, it’s important to keep an eye on the broader market trends and commodity prices, as they do play a role in Freehold’s performance. While the stock has seen a slight dip from its 52-week high, its current trading price of around $13.75 suggests that it might be a good entry point for investors looking to gain exposure to the energy sector with a focus on income. So, how much could investors get from a $20,000 investment?
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | PORTFOLIO TOTAL |
| FRU | $13.44 | 1,488 | $1.08 | $1,607.04 | monthly | $20,000 |
Investors could, therefore, pick up a whopping $1,607.04 in annual dividend income alone, without even considering returns! And that comes down to $133.92 each and every month.
