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Franco-Nevada Stock: A Golden Opportunity for Precious Metal Investors?

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Gold is an alternative asset class that has remained popular among investors for several decades. Viewed as a store of value and a hedge against inflation, gold offers you the benefit of diversification, reducing overall portfolio risk.

Typically, the prices of gold gain momentum in periods of economic downturns. As share prices move lower, investors flock to safe-haven assets such as gold. The yellow metal also has an inverse relationship to interest rates.

So, if you expect interest rate hikes to cool off in 2023 or the economy to enter a recession in the next 12 months, it makes sense to increase exposure to gold.

How can TSX investors gain exposure to gold?

One way to invest in gold is by purchasing shares of companies that explore and mine the precious metal. Gold mining stocks offer significant advantages. First, their share prices are tied to the performance of gold.

Additionally, they can expand production capabilities by exploring new mines, funding expansion plans, or acquiring other mining properties. Third, gold mining stocks with strong balance sheets may also offer shareholders a dividend, creating a passive-income stream in the process.

Investors can consider gold streaming and royalty companies too, that provide miners with the required capital to develop and expand mining capabilities. Typically, streaming and royalty companies generate revenue by purchasing gold at a fixed price or engaging in a revenue-sharing model with gold miners.

As these stocks are traded on major exchanges, you can easily invest in the companies with a brokerage account.

With these factors in mind, let’s see if you should invest in Franco-Nevada (TSX:FNV) stock right now.

Is Franco-Nevada stock a buy or a sell?

Franco-Nevada is a TSX giant valued at a market cap of almost $40 billion. It’s a royalty and streaming company with a large and diversified portfolio of cash-producing assets. The company’s portfolio includes 419 assets that span 66,000 km, primarily across the Americas.

Gold accounts for 55% of total sales, followed by silver at 11%, while Canada and the U.S. generate close to 70% of revenue.

Over the years, Franco-Nevada has grown its top line at an enviable rate, while maintaining solid profit margins. It sold around 700,000 gold equivalent ounces in 2022 — up from less than 200,000 in 2008. This has allowed the company to grow its revenue from $150 million in 2008 to $1.3 billion in 2022. Its net income per share has also expanded from $0.5 to $3.5 in this period.

Due to its stellar revenue and earnings growth, Franco-Nevada stock has returned over 1,000% to shareholders after adjusting for dividends. The TSX stock currently pays investors an annual dividend of $1.84 per share, translating to a dividend yield of 0.9%. These payouts have increased by 10% annually in the last 10 years, showcasing the resiliency of its business model.

Priced at 43 times forward earnings, Franco-Nevada stock trades at a premium, which makes it vulnerable if market sentiment turns bearish. However, the company also ended the first quarter of 2023 with an adjusted earnings before interest, tax, depreciation, and amortization margin of 83%.

Armed with a consistent cost structure, Franco-Nevada benefits massively from an increase in commodity prices. With $2.2 billion in available liquidity, Franco-Nevada has enough resources to reinvest in organic growth or pursue other development projects, making it a compelling investment right now.

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