Share of precious metals streaming company Franco-Nevada Corp (NYSE: FNV) have risen about 25% over the past year. Gold was only up around 11% over the same span, with silver roughly breaking even. If you are looking for a precious metals investment to help diversify your portfolio, however, Franco-Nevada remains an attractive option despite the strong gain relative to the commodities that back its top- and bottom-lines. Here are the key benefits buying Franco-Nevada will grant you and your portfolio.
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The first thing to understand about Franco-Nevada is that it is a streaming and royalty company. That means it provides miners cash up front for the right to buy silver and gold at reduced prices in the future. Miners use the cash to pay down debt, build new mines, and expand existing ones. In exchange, Franco-Nevada gets to lock in low prices and wide margins. This is a big difference that separates this company from both miners and streaming peers like Wheaton Precious Metals (NYSE: WPM) and Royal Gold (NASDAQ: RGLD).
An example will help illustrate the point. Franco-Nevada has a deal with commodity giant Glencore at the Antapaccay mine. Franco-Nevada paid $500 million up front to Glencore and gets to buy gold and silver for 20% of the spot price until certain production targets are met, and 30% of spot price thereafter. So Franco-Nevada's margins will remain substantial no matter what gold and silver prices are doing. Miners, for comparison, have to adjust their cost structures, an often time-consuming and difficult task, to maintain profitability during commodity downturns.
In other words, if you are looking to add precious metals exposure to your portfolio, you should strongly consider Franco-Nevada and its streaming peers. They have a leg up on miners based on their basic business model.
There's more to Franco than meets the eye
But why pick Franco-Nevada? The truth is, any of the major streaming companies would be an adequate option. But I think Franco-Nevada has some key advantages that make it a better overall choice.
First up is diversification. Wheaton's portfolio contains 28 investments, 20 of which are producing. Royal Gold trounces that with 195 properties, 40 of which are producing. But Franco-Nevada has the most diverse portfolio of all, with 340 investments, 47 of which are producing gold and silver mines. If you are looking to the diversification benefits of owning a precious metals company, Franco-Nevada takes it a step further by providing the most portfolio diversification too.
There's another wrinkle in that portfolio number, however. The streaming model is somewhat opportunistic in nature, with miners most eager to make a deal when precious metals prices are weak. Relatively low oil and natural gas prices led Franco-Nevada to extend its reach into the energy space, where it has 80 properties, using the same basic model it has executed so successfully with gold and silver miners. Drillers have proven just as eager as miners to ink deal during an industry downturn, and energy makes up roughly 7% of revenues today. Neither Royal Gold nor Wheaton offer this added level of diversification.
Clearly, if you want a pure play gold and silver investment, Franco-Nevada doesn't qualify. But if diversification is what you are after, the energy exposure is a net benefit in my eyes. And most important, it is expected to grow pretty quickly -- management is calling for oil revenues to roughly doubled between 2016 and 2021. There's no way it could achieve that on the gold and silver front without a massive spike in precious metals prices.
Franco-Nevada also has a long history of rewarding investors with dividend hikes. It has increased the annual dividend every year since its IPO in late 2017. That roughly-10-year streak doesn't match up with Royal Gold's 17 consecutive annual hikes, but that's not really a fair comparison since Franco-Nevada has a shorter corporate history. (Wheaton has a variable dividend policy designed to fluctuate with the company's results.) If you are an income-focused investor, Royal Gold and Franco-Nevada are each solid options in the precious metals space despite their modest 1.1% or so yields. But Franco-Nevada's diversification gives it the edge in my eyes.
Sticking around to see the benefits
If you are looking for a precious metals investment because you want to diversify your portfolio, streamer Franco-Nevada is a great option today. It has the most diversified portfolio among its immediate peers (including an opportunistic investment in the energy industry) and a long history of rewarding investors with regular annual dividend hikes, and is built on a business model that's got a notable edge over miners. Peers Royal Gold and Wheaton share some of these traits, but neither has all of them.
In the end, I believe that Franco-Nevada will help investors stick around through the good times and bad in the commodity markets to see the full diversification benefit that precious metals offer to a portfolio. That's true even though the stock's price has run up nicely over the past year. But even if you decide not to buy right now, I'd suggest you put Franco-Nevada on your wish list for a price pullback.
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