Inflation has skyrocketed to a 40-year high this year due to the immense fiscal stimulus packages offered by most countries in response to the pandemic and the ongoing war in Ukraine. Even worse, while inflation was initially characterized as transitory by central banks, it has persisted much longer than expected.
Silver stocks are interesting candidates in this investing environment, as they greatly benefit from the high prices of precious metals. If inflation remains abnormally high for years, these stocks have good chances of outperforming the broad market.
Here we will discuss the prospects of three top silver stocks, which are thriving in the current business landscape.
3 Silver Stocks for Rising Inflation
Wheaton Precious Metals
Wheaton Precious Metals (WPM) was formed in 1994 and was previously known as Wheaton Silver. It is the largest metal streaming company in the world and it is different from other well-known producers of precious metals, as it does not own the mines; instead, it purchases the right to buy silver and gold at a low fixed cost. The company currently has agreements with 23 mines.
As a commodity producer, Wheaton has exhibited highly volatile business performance over the last decade. It enjoyed excessive profits in 2012-2013 thanks to the multi-year high price of silver in those years but its earnings remained suppressed during 2014-2019 due to low commodity prices. Investors should be aware of the dramatic cyclicality of this business before purchasing this stock.
Wheaton is currently at the upper part of its cycle. The prices of gold and silver have rallied close to all-time highs since the onset of the coronavirus crisis thanks to the unprecedented fiscal stimulus packages offered by several governments in response to the pandemic. As a result, Wheaton doubled its earnings per share in 2020 and grew its bottom line by another 17% last year. This year, the company is likely to incur a 4%-5% decrease in its EPS, primarily due to the aggressive stance of central banks, which have prioritized restoring inflation to normal levels at the expense of economic growth.
On the one hand, Wheaton still enjoys excessive profits compared to its historical average. On the other hand, it is prudent for investors not to expect material earnings growth in the upcoming years off this year’s high comparison base. While the prices of precious metals may remain elevated for a considerable period, they are likely to revert towards their historical average levels at some point in the future. Whenever this happens, Wheaton will incur a significant decline in its earnings.
Wheaton is currently offering a nearly 10-year high dividend yield of 1.9%. As it has a healthy payout ratio of 48% and a debt-free balance sheet, its dividend seems safe for the foreseeable future. On the other hand, the company has a poor dividend record due to its high cyclicality. In 2014, Wheaton cut its dividend by 42% due to the downturn of commodity prices.
Overall, the stock is not suitable for income-oriented investors. Instead, it is suitable for those who believe in the adverse scenario of persistently high inflation for years.
Glencore (GLCNF) was founded in 1974 and is one of the global leaders in the mining sector. In its current form, the company is the result of the merger between Glencore with Xstrata in 2013. The company smelts, refines, mines, processes and stores silver, copper, zinc, aluminum, nickel, cobalt, iron ore and other metals.
Glencore, which is the largest company in Switzerland, also has an energy and agricultural products segment. As a result, it is the most diversified company in its peer group. Diversification is especially important when considering silver stocks, given the volatility of the prices of precious metals.
In the first half of this year, Glencore exhibited poor operational performance at some industrial assets due to adverse weather, geological challenges and supply-chain disruptions. Nevertheless, the company greatly benefited from the rally of commodity prices. As a result, its EPS jumped from $0.10 in the first half of 2021 to $0.92. The results of Glencore confirm that its earnings are much more sensitive to the underlying commodity prices than to the business performance of the company.
Going forward, Glencore may face some headwinds, as central banks seem determined to raise interest rates aggressively in an effort to restore inflation to normal levels. Higher interest rates and lower inflation are likely to take their toll on commodity prices. However, the prices of coal and LNG are likely to remain elevated for the foreseeable future due to the energy crisis caused by the ongoing war in Ukraine. As the markets of coal and LNG are extremely tight, these two products are likely to provide a strong buffer to the results of Glencore in the upcoming quarters. This is a testament to the merits of the highly diversified business model of Glencore.
Finally, Glencore is viewed by some investors as exposed to the ongoing shift from fossil fuels to clean energy sources. However, the current energy crisis has proved that the potential of renewable energy sources is limited so far. Moreover, Glencore has performed excessive investments in key transition metals, such as copper, cobalt and nickel. Given also the promising prospects of its LNG business, the company seems to be well positioned for the transition of the global energy market.
Glencore is currently offering an exceptionally high dividend yield of 4.9%. However, investors should not view Glencore as a reliable dividend stock due to the high cyclicality of commodity prices. In the severe downturn of commodity prices in 2015, the company cut its dividend by 47%. Nevertheless, Glencore is the most diversified producer of commodities that investors can find in the investing universe.
Fresnillo (FNLPF) is a leading producer of precious metals in Mexico. Its flagship mine has been in operation for nearly 500 years. Although the company in its current form has a history of more than a century, it became a listed company in London in 2008. Fresnillo has proven expertise in the mining value chain, from exploration through to mine development and operation.
Fresnillo has high-quality assets, with a long lifetime. Its reserves include 2.3 billion ounces of silver and 39 million ounces of gold. The company also has a rock-solid balance sheet, with a negligible amount of debt. A strong balance sheet is paramount in this highly cyclical business, as the indebted companies suffer during the downturns of commodity prices.
Fresnillo is currently facing some business headwinds. In the first half of the year, the company posted a 13% decrease in its revenue and a 53% decrease in its EPS, primarily due to lower gold volumes, but also due to lower silver prices. The production of gold slumped 28% over the prior year’s period due to a decrease in the volume of ore processed and lower ore grades at Herradura and Saucito. On the bright side, the company has a promising pipeline of growth projects, which have just come online and thus they are expected to begin generating material cash flows.
Fresnillo is currently offering a dividend yield of 3.2%, which seems attractive on the surface. However, investors should be aware that the dividend record of Fresnillo has been extremely volatile, with many dividend reductions, including an 83% dividend cut in 2014. Thanks to its rock-solid balance sheet, Fresnillo is an ideal stock to purchase during a downturn of the prices of gold and silver.
The above three silver stocks are thriving in the current environment, which is characterized by high inflation and above-average prices of precious metals. As long as inflation remains high, these stocks are likely to keep generating growth and paying solid dividends to shareholders.
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