Since the Bank of Canada started its rate-cutting cycle in June this year, Canadian stocks have advanced considerably. As of this writing, the TSX is up 16.36% year to date. However, the broad market’s performance pales compared to the top-performer among 11 primary sectors.
The materials sector, where metals and mining stocks belong, has a market-beating return of 30.49% thus far. You can find the best gold stocks in the sector, including Franco-Nevada (TSX: FNV). This dividend gem is a winning investment in 2024. At $185.27 per share, FNV pays a 1.06% dividend. While the yield is modest, the quarterly is safe and secure owing to the low 37.85% payout ratio.
Current investors delight in the 27.41% year to date and look forward to higher returns through price appreciation. Market analysts recommend a buy rating. Their 12-month average and high price targets are $206.48 (+10.3%) and $264.96 (+30.1%).
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Low-risk, free cash flow business
Franco-Nevada is relatively new (founded in 1986) but owns a diversified portfolio of cash flow-producing assets. The $35.65 billion royalty and streaming company is gold-focused and operates in 14 countries (85% from the Americas) with exposure to various commodities (75% precious metals).
According to management, the primary objectives are to minimize risk, pay dividends, and maintain a strong balance sheet. The business model is unique. Franco-Nevada does not operate mines, develop projects or conduct exploration activities. It owns and grows a diversified portfolio of royalties and streams. Because of this setup, it is essentially a free cash flow (FCF) business.
The business model generates strong cash flows due to high margins and low overhead costs. The advantage to investors is the limited exposure to cost inflation and other operational risks. Franco-Nevada also aims to be the go-to gold stock for the generalist investor. You have a low-risk investment to hedge against market volatility.
Financial performance
Gold prices in the second quarter (Q2) of 2024 were high, although Franco-Nevada reported lower top- and bottom-line numbers. In the three months ending June 30, 2024, revenue and net income declined 26.8% and 132.1% year over year to $260 million and $79.5 million. Net cash provided by operating activities fell 26.5% to $371.7 million from a year ago.
Franco-Nevada’s chief executive officer, Paul Brink, expects more substantial contributions in the second half of the year from other recently commenced production assets. The latest additions, SolGold’s Cascabel copper-gold development project (gold stream) in Ecuador and Newmont’s Yanacocha operations in Peru (royalty), have potentially long-life assets.
An important thing to note is that Franco-Nevada is debt-free, and therefore, it uses free cash flow for portfolio expansion and dividend payments. At the quarter’s end, the cash in hand reached $1.44 billion, 1.4% higher compared to the same period last year.
Dividend aristocrat
Franco-Nevada believes it has the right ingredients to appeal to investors. Besides a lower-risk option and strong balance sheet, dividends are growing progressively. This top-tier mining stock has increased its dividends for 17 consecutive years. Its Dividend Aristocrat status makes it a strong buy for investors looking to add stability to their passive-income portfolios.
