Producers are energy stocks, but there are also lower-risk royalty stocks such as Royalties on the House The last two-and a half years have seen a lot of ups and downs for the TSX:FRU.
During the first half of the pandemic all economic uncertainty and shutdowns had a significant impact on energy prices. Energy stocks were the worst-hit businesses.
The industry recovered and many stocks saw huge recoveries in share prices.
The momentum and rally continued into 2012, when they exploded in value again. Russia invaded Ukraine and many sanctions were later imposed.
Recently, however, oil and natural gas prices have fallen due to economic fears. This has brought Freehold stock with it.
Therefore, after the high-potential energy sector has pulled back recently, now is a great time for investors to add to their positions, especially if you’re under-exposed to energy.
Is Freehold stock the best option to buy today at these low prices?
What is Freehold stock?
Unlike many energy producers that extract oil, natural gas, or both from the earth, Freehold’s business model is much simpler: it acquires the land that these producers are using.
This way, Freehold doesn’t have to have any of its own operations. Freehold simply holds the land and receives its royalty as other companies use its real property.
Although this is a lower-risk business, Freehold stock remains vulnerable to commodity prices. The execution risk is much lower and there are fewer things that could go wrong.
A royalty business is also very attractive economically, especially in this changing environment where global energy markets are shifting.
Freehold, for example, saw a 25% increase of production in the first quarter 2022. This was largely due to increased activity by producers as western energy prices rise.
But what’s so attractive about other companies increasing production is that Freehold has to spend no money and yet continues to reap the rewards and earn royalties on all that increased production.
So, if Freehold stock has no capex to spend, what does it do with all the cash it’s bringing in? The stock has been growing its portfolio quickly in recent years, particularly south of the border. This is important because it helps Freehold diversify their land ownership and exposes them to greater growth potential.
Therefore, with the stock offering tons of attractive qualities, it’s certainly a high-quality energy stock to buy and hold. But, is $13.50 a share worth it to buy Freehold stock at this price?
Freehold is a $13.50 buy
Because of Freehold’s attractive business model, the company has unbelievable financials. Freehold’s cash flow allows it to pay a substantial dividend and have cash available for future land acquisitions.
In fact, right now, Freehold’s dividend yield As the stock’s price has fallen in recent weeks, its dividend yield has increased to more than 7.1%. However, even with a massive dividend yield of more than 7%, Freehold’s payout ratio is currently below 60%, and that’s using conservative estimates of commodity prices this year.
Freehold could still continue to generate positive cash flow even after it pays its dividend.
Therefore, it’s no surprise that Freehold’s average target price is around $19.25 and a roughly 50% premium to Monday’s closing price.
So, if you’re looking for high-quality energy stocks to buy as the industry pulls back, Freehold is one of the most impressive stocks that you can buy today.