Investing in monthly dividend stocks is a good strategy for beginning a recurring passive-income stream at a low cost. One such TSX dividend stock that offers a high yield is Freehold Royalties (TSX:FRU). It pays investors a monthly dividend of $0.09 per share, indicating a forward yield of 7.7%.
Let’s see if Freehold Royalties stock should be part of your equity portfolio right now.
An overview of Freehold Royalties
Valued at $2.1 billion by market cap, Freehold Royalties manages one of the largest non-government portfolios of oil and natural gas royalties in Canada with an expanding land base in the United States. Its total land holdings encompass 6.2 million gross acres in Canada and 1.1 million drilling acres south of the border.
The company strongly focuses on business development and accretive acquisitions. It has interests in more than 18,000 producing wells and receives royalty income from more than 380 industry operators. This diversity reduces operational risk for Freehold as it benefits from industry drilling activity on royalty lands.
As a royalty-interest owner, Freehold does not pay any capital costs to drill or equip the oil wells for production. Moreover, it does not incur any costs to operate the wells or maintain production, resulting in high profit margins.
Freehold Royalties aims to deliver growth and risk-adjusted returns to shareholders over time. It acquires quality assets with acceptable risk profiles and long economic life while generating gross overrising royalties for revenue growth.
Freehold Royalties maximizes its royalty interest through a comprehensive audit program while driving oil and gas development through lease-out programs. Further, it manages debt prudently, with a target of less than 1.5 times net debt to funds from operations.
How did Freehold Royalties perform in Q1 of 2024?
In the first quarter (Q1) of 2024, Freehold Royalties reported revenue of $74 million, while its funds from operations (FFO) stood at $54 million or $0.36 per share. The company paid $41 million or $0.27 per share in dividends, indicating a payout ratio of 75%.
Freehold Royalties stated that its North American portfolio continues to attract drilling activity, with 300 gross wells drilled on its royalty lands in Q1 of 2024, a 15% decline over the last quarter. The leasing of its mineral title lands continues to be active, with 20 new leases signed in Q1 in Canada, continuing the momentum from the 122 leases signed last year.
Freehold’s oil-weighted portfolio and the premium pricing received on its U.S. assets helped it achieve top-tier realized pricing of $54.81 barrels of oil equivalent. Comparatively, weaker natural gas pricing resulted in 5% lower realized pricing than the previous quarter.
Following the closing of the Permian acquisitions this January, Freehold ended Q1 with a net debt of $211 million, or 0.9 times trailing FFO. Its higher margin, oil-weighted portfolio allows the company to provide consistent and sustainable returns to shareholders while retaining the flexibility to fund future growth projects.
Priced at 10 times trailing FFO, the TSX dividend stock is quite cheap and trades at a discount of 27% to consensus price target estimates. After adjusting for its dividend, total returns could be closer to 35% in the next 12 months.
