Written by Brian Paradza, CFA at The Motley Fool Canada
Market chatter over the likelihood of Bitcoin competing with or replacing gold as a defensive asset to buy and hold to protect investor portfolios during bad economic times has since declined with a weak cryptocurrency market in 2023. However, gold has maintained its desirable defensive status for decades, and Canadian gold stocks retain their glamorous glitter. Franco-Nevada (TSX:FNV) stock could shine even brighter over the coming months and fortify retirement plan portfolios.
Franco-Nevada is a $37.2 billion gold and precious metals royalty and streaming company that generated nearly 290% in total returns to its stock investors over the past 10 short years. The gold stock diversified its cash flow through some oil and gas exposure in recent years. Although past performance doesn’t guarantee future returns, investors may expect FNV stock to gain more value going into 2024 as the company executes for near-term growth and sustained resilience. Shares gained 21.6% in value over the past 12 months.
Why buy and hold Franco-Nevada stock right now?
Franco-Nevada reported a 12.3% revenue decline during the first half of 2023, but that phase should reverse during the second half of the year, and record free cash flow could follow in 2024. If valuation multiples remain steady, investors may enjoy further capital gains on the gold stock over the next 12 to 24 months.
Weaker revenue and earnings during the first six months of this year were a product of production disruptions at a core production asset in Peru (which resolved during the second quarter) and weaker oil, gas, and iron ore prices. Interestingly, gold prices hovered around US$1920 per ounce at the time of writing, or 5.3% higher so far this year. Gold comprised 64.8% of Franco-Nevada’s quarterly revenue by June this year.
Further, oil prices have since surged by 21% during the past three months, and natural gas prices have printed a 16% gain since early June 2023. Revenue and cash flow from the royalties portfolio could significantly grow during the second half of 2023.
Watch out for a record free cash flow at Franco-Nevada
Bay Street analysts currently project Franco-Nevada revenues to drop by a lower margin of 3.7% for 2023 before surging strongly by 11.7% year over year to more than US$1.4 billion in 2024. Annual free cash flow may grow beyond US$1 billion for the first time ever next year. The best that Franco-Nevada stock investors saw on the free cash flow metric was US$858 million produced in 2022.
Free cash flow is the lifeblood of any business enterprise, and Franco-Nevada is poised to generate lots of it over the next 12 months, if gold prices remain steady, production grows, and oil cooperates.
Supported by growing free cash flow, the company has made significant new investments in royalty, stream, and working interests during the first half of this year. Franco-Nevada disbursed US$270.8 million buying new royalties and streams between January and June 2023. In comparison, management only invested US$12.8 million during the same period last year.
The company is in a growth mode, and it has vast amounts of free cash flow to work with. The company could accelerate its acquisitions of new royalties on precious metals mining production, fund growing dividends, and grow its global asset footprint.
I am bullish on what Franco-Nevada stock could do for investors over the next 12 to 24 months.
Time to buy Franco-Nevada stock?
Franco-Nevada is a gold stock to hold onto for dear life. The company has zero debt on its balance sheet, and management doesn’t concern itself much about high interest rates, which increase financing costs for other mining concerns. Actually, the company has a growing cash pile that could be deployed into buying new royalties, compounding its earning potential. The best part is that FNV stock’s forward price-to-earnings multiple has dropped from 41 in June to 36 today. Shares appear cheaper in September, growth is on the horizon, and a near-term recession may not prick significant holes into the defensive gold stock’s protective shield on investor portfolios.
The post Building a Resilient Retirement Portfolio? I’d Buy Franco-Nevada Stock in September 2023 appeared first on The Motley Fool Canada.
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