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Franco-Nevada (NYSE: FNV) is, at its core, a precious metals company. But it is not a miner; it is a streaming and royalty company, which means it provides cash up front to miners in exchange for the right to buy gold and silver in the future at advantaged prices. For more conservative investors, it is a good way to add precious metals to a portfolio for diversification purposes. Sixteen consecutive annual dividend increases prove that. But there are some nuances to consider here, and oil is a fundamental factor to keep in mind.
Franco-Nevada is lagging behind its peers
If you are looking at Franco-Nevada, you'll also find Royal Gold (NASDAQ: RGLD) and Wheaton Precious Metals (NYSE: WPM) interesting. These are the three largest companies in the streaming space. As the graphic below shows, Franco-Nevada has been a notable laggard of late, even as gold has been near record highs.
This is what makes Franco-Nevada so interesting right now. Adding to the attractiveness is the company's 1.3% dividend yield. On an absolute level, that's tiny, but the purpose of this stock in a portfolio is really about adding diversification. The yield and the 16 years of annual dividend growth are icing on the cake for conservative income-focused investors. The yield, however, is the highest it has been in five years. It has also closed a gap that existed between Franco-Nevada, Royal Gold, and Wheaton. That suggests that Franco-Nevada is no longer being afforded a premium valuation.
If you are looking at the spike in gold and trying to find a way to invest in the space while generating a reliable stream of income, Franco-Nevada could be an attractive way to get that done.
Franco-Nevada is a bit different
There are a couple of reasons for Franco-Nevada's laggard performance. The first is a big-picture difference between this company and its closest peers. In addition to gold and silver streaming, Franco-Nevada also invests in energy projects using a similar business model. In total, energy made up around 17% of the company's revenue in the third quarter, so it isn't the most important part of the business, but it isn't inconsequential, either. Oil prices wax and wane over time, and they were down year over year in the quarter. So, this business has been a drag on performance of late.
The important thing to remember is that adding energy wasn't an accident. Franco-Nevada was purposefully looking to increase the diversification of its portfolio to help smooth out performance over the long term. Right now, oil is a relative headwind, but that hasn't always been the case. The two commodities often move in very different ways. For investors who place an emphasis on portfolio diversification, this will probably be a positive selling point.