Gold is an alternate asset class that has been successful as a store of value. This basically means gold has delivered inflation-beating returns to long-term investors, allowing them to build wealth at a consistent pace.
But what drives the prices of gold higher, in addition to consumer demand? First, gold generally has an inverse relationship with interest rates. So, when interest rates fall, investors will shift their capital toward other asset classes, including gold, resulting in higher prices. Similarly, gold also benefits from geopolitical tensions and in periods of economic recessions.
After multiple interest rate hikes by central banks globally, inflation has somewhat cooled off after touching 40-year highs in the U.S. last year. While bond rates might move lower, investors should also brace for the threat of economic recession, both of which will act as tailwinds for the yellow metal.
Gold is well-positioned for another upswing in prices, making it a top investment in 2023. But buying physical gold is not hassle-free. Instead, you can get exposure to gold by investing in royalty companies such as Franco Nevada (TSX:FNV).
Typically, royalty companies fund gold miners and benefit from ownership rights to these gold reserves. They earn revenue as a fixed percentage of the gold produced each year.
Gold royalty companies are also less risky as they are relatively immune to cost overruns that have plagued mining companies over the years.
Is Franco-Nevada stock a good buy?
A Canada-based streaming and royalty company, Franco-Nevada is valued at a market cap of $27 billion. It is equipped with a diversified portfolio with royalty agreements tied to silver, iron ore, oil and gas, and platinum group metals or PGMs, in addition to gold. In 2022, gold sales accounted for 55% of the company’s total revenue. It owns properties in Canada, the U.S., Latin America, and other global markets.
Franco-Nevada stock went public in late 2007 and has since returned a stellar 1,360% to shareholders after adjusting for dividends. In this period, the TSX Index has gained just 133.6%. Franco-Nevada has raised dividends at an annual rate of 8.8% in the last 16 years and currently offers shareholders a dividend yield of 1%.
What next for Franco-Nevada stock price and investors?
Franco-Nevada’s contracts with miners allow it to generate cash through the sale of commodities. A steady stream of cash flows enables the company to reinvest in other exploration projects, as well as consistently increase dividends.
Armed with a debt-free balance sheet, Franco-Nevada has enough flexibility, given its diversified earnings and sustainable dividend payout ratio. In the last five years, Franco-Nevada has increased earnings by 25% annually. Priced at 39 times forward earnings, analysts expect the company to increase earnings by 8% annually in the next five years.
In the near term, Franco-Nevada expects to earn revenue from mines such as Candelaria, Cobre Panama, and Antamina. Its focus on cost optimization should also result in higher profit margins.
Franco-Nevada is a quality large-cap TSX stock that has several cash-generating assets. Its asset-light model and strong financials make FNV stock a solid bet for 2023 and beyond.
