Stock Market: This Royalty Company Is Passing on Profit Growth to Investors
This fossil fuel company that saw its profits recently rise with the price of oil and natural gas is quick to pass on earnings to investors. Photo: pandemin/GettyImages
Looking for a company that’s quick to pass on earnings to investors? Meet Freehold Royalties (TSX: FRU), a fossil fuel company that saw its profits shoot up as oil and natural gas prices rose.
Most companies only increase their dividend once a year (if they do so at all). Freehold has bumped its return four times in the past 12 months.
Here’s what you need to know:
Freehold Royalties Ltd. (TSX: FRU)
Type: Common stock
Current price: $11.83
Entry level: Current price
Annual payout: $0.60
Yield: 5.1 per cent
Risk: Higher risk
Recommended by: Gordon Pape
The business: Calgary-based Freehold is a dividend-paying oil-and-gas royalty company with assets predominately in western Canada, although it is expanding in the U.S. Its primary focus is to acquire and actively manage royalties, while providing a lower-risk income vehicle for shareholders. Freehold has one of the largest independently owned portfolios of royalty lands in Canada, with land holdings totaling more than 6.7 million gross acres.
The security: I recommend buying the common stock, which trades in Toronto under the symbol FRU.
Why I like it: Freehold has been quick to share its improving earnings with stakeholders. It has raised its monthly payment four times in the past year and now yields over 5 per cent.
Financial highlights: Second quarter results showed a year-over-year revenue increase of 204 per cent, to $44.5 million. Net income jumped to $12.5 million ($0.10 a share) from a loss of $5.4 million (-$0.05 a share) in the same quarter of 2020.
Total production increased by 20 per cent, to 11,137 barrels of oil equivalent per day.
The company is actively expanding its base, with four recent purchases. Three involve U.S.-based assets, with the largest deal valued at $227 million. Management said the deal will significantly enhance Freehold’s North American portfolio and will improve both the near-term and long-term sustainability of the company’s dividend.
Risks: As recent history has shown, this can be a volatile stock. The dividends and the share prices depend heavily on the prices of oil and natural gas. The company was quick to hike dividends as energy prices improved. It will lower them again just as fast if we see a price plunge.
Distribution policy: Dividends are paid monthly. The current rate is $0.05 per share.
Tax implications: The dividends are eligible for the dividend tax credit if held in a non-registered account.
Who it’s for: This security is suitable for investors who are willing to take on above-average risk in exchange for a 5.1 per cent yield and the potential for future dividend increases if natural gas and oil prices stay high.
How to buy: The shares trade on the TSX, with an average daily volume of almost 650,000. They are also listed on the U.S. over-the-counter market under the symbol FRHLF.
Summing up: The company has turned itself around and the new emphasis on acquiring U.S.-based royalties looks promising. Obviously, this stock is not suitable if you wish to avoid fossil fuel companies.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe