This Stock Has A Hefty Dividend And Boasts A One-Year, 104% Gain.
KEY POINTS: FREEHOLD IS A LOW-RISK OIL STOCK
- Canadian oil producer Freehold Royalties has production in Canada and the United States, and is a low-risk oil stock.
- Freehold’s oil revenues come from “the top of the barrel” without “lifting costs” and other operating costs.
- FRU pays a handsome monthly dividend of 8 cents per share (96 cents per year), resulting in a 6.40 percent yearly return to the shareholder.
Oil prices are soaring, and so are the hottest oil stocks — but they’re not all low risk. Freehold Royalties Ltd. (TSE:FRU.TO) has been up 94% in the last year, far outperforming the broad market return of roughly 18%. And that doesn’t even include its dividends. As a result, shareholders should be pleased. The stock price is about 76 percent higher than three years ago.
Fundamentals
Let’s look at how a company’s fundamentals have influenced long-term investor returns.
Freehold Royalties’ EPS increased from a deficit to a profit during the previous year. At this point, FRU has a clean balance sheet, with total debt representing less than one year of cash flow.
When a firm is on the verge of profitability, it may be worth taking other metrics into account to assess growth accurately (forecasting share price changes).
First, we suspect that the dividend, which increased throughout the year, boosted the share price. The firm may be reaching maturity, and dividend investors buy for the yield, pushing up the price. However, 129% revenue growth helps a little.
Second, we should note that we’ve seen a significant increase in insider purchases throughout the previous quarter, which we consider to be good. On the other hand, we feel revenue and earnings trends are more telling when evaluating a firm’s performance.
Dividends
This week, Freehold announced a 33% dividend raise. Notably, FRU has increased this dividend six times in the past 12 months.
We believe it’s critical to look at the total shareholder return (TSR) and share price performance for each stock. A share price rise only reflects the change in the value of a stock; the TSR, on the other hand, includes both dividend and appreciation. As a result, the TSR arguably provides a more comprehensive view of a company’s profit growth.
Indeed, for Freehold Royalties, the TSR over the last year was 104%, which is greater than the share price appreciation shown above. That appreciation is primarily due to its dividend payments.
Their stated goal is to pass 60 percent of free cash flow to shareholders. Currently, that number is under 35 percent. We would expect dramatic increases in dividends from FRU over the next year if current oil and gas prices hold.
We love that FRU believes that management should immediately pass on the company’s successes to the shareholders.
An undervalued, low-risk oil play
Due to recent royalty interest acquisitions and drilling activities on Freehold’s lands, FRU’s royalty revenues are increasing. Moreover, this drilling is conducted at no cost to FRU, thus dramatically reducing FRU risks.
The shares currently trade at $15.15 per share. At that price, the market is undervaluing FRU. The most recent analyst forecasts target a $17-$18 share price. However, with recent increases in the price of both oil and gas, we believe these forecasts will be revised upward. Maybe dramatically upward. We think FRU fits the bill as a low-risk oil stock.
