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Is Freehold Royalties Stock a Buy Just for the 7.4% Dividend Yield?

energy industry
Image source: Getty Images

Written by Amy Legate-Wolfe at The Motley Fool Canada

Before I get into this, let me be clear on one thing. A stock is never a good buy just for a dividend yield. The problem here is that a dividend yield is usually ultra high, because shares are lower than they should be. Further, a dividend can be cut. So, that dividend yield you’re buying is anything but locked in.

Because of this, it’s important to consider everything when it comes to picking up a dividend stock. So, is Freehold Royalties (TSX:FRU) a great stock to buy based on its 7.37% dividend yield as of writing? No. But it certainly is for other reasons, with that dividend yield the cherry on top.

Earnings explosion

Freehold stock missed analyst estimates quarter after quarter during the last while. That is, until recently, when the company surged past estimates. The royalty company, which acquires and manages royalty interest in crude oil, natural gas, and potash, recently reported earnings that saw shares climb sky high.

The major news for the third quarter was that the company averaged a record of 5,427 barrels of oil equivalent per day (boe/d) in the United States. This represented 12% organic growth compared to last year and a 17% improvement versus the same time last year. Its U.S. portfolio became the key driver behind funds from operations, climbing to $65 million during the quarter.

Freehold stock also enjoyed 24 new leases, with 102 leases signed in the third quarter, another record for the company. The stock saw $85 million in revenue, with $41 million in dividends paid to investors. This was an 8% increase from 2022 levels. Finally, the company also continued to see debt fall, with net debt dropping 33% from last year’s levels.

Guidance goes up

The third quarter also saw guidance increase after the positive results. Production guidance now sits at between 14,500 and 15,500 in boe/d for 2023. Further, funds from operations should reach between $250 and $280 million. And while that’s all great, the company remains a steal, even with analysts reiterating a buy rating pretty much across the board.

In fact, Freehold stock is set to perhaps outperform, thanks to its status as a royalty company. Royalty companies own a portion of a company or the asset it produces — in this case, oil, gas, or potash. It’s, therefore, a great way to get into a sector without worrying about the operating costs and instead raking in cash flow. That is, as long as the company makes solid investments.

Freehold stock remains a company with a long history of making good deals and investments. In fact, whether it’s short term in this bear market or long term in a bull market, Freehold stock looks like a solid performer. Even if we see companies switch over to renewable energy, the company could simply switch its strategy.

How about that dividend?

This is all to say that the dividend for Freehold stock looks safe and secure. The company currently offers a 7.37% dividend yield as of writing. It trades at just 15.55 times earnings as well, putting it in value territory.

Plus, shares may be down 12% in the last year, but they’ve risen fairly steadily in the last month or so, especially after the recent results that show record production in the United States. Meanwhile, it continues to trade at a valuable 2.36 times book value and holds an enterprise value over earnings before interest, taxes, depreciation, and amortization of just 7.93. Furthermore, it would take just 15.96% of its equity to cover all its debts. That puts it in a very promising position.

In fact, it looks as though the company has cash to spare on more deals. Therefore, there could be even more substantial growth in the near future. So, if you’re looking for a strong stock that’s set to continue its dividend, certainly pick up Freehold stock — especially as not only can you look forward to that 7.37% dividend yield today, but looking back, investors can count on a five-year average of 7.19% as well.

The post Is Freehold Royalties Stock a Buy Just for the 7.4% Dividend Yield? appeared first on The Motley Fool Canada.

Should You Invest $1,000 In Freehold Royalties Ltd.?

Before you consider Freehold Royalties Ltd., you'll want to hear this.

Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in November 2023... and Freehold Royalties Ltd. wasn't on the list.

The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 24 percentage points. And right now, they think there are 5 stocks that are better buys.

See the 5 Stocks * Returns as of 11/14/23

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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Freehold Royalties. The Motley Fool has a disclosure policy.

2023