It hasn’t been a good couple of weeks for Alaris Royalty Corp. (TSX:AD).
The company came out with interim earnings on July 26 that the market didn’t like. The smoking gun was its investment in KMH, which is a healthcare company operating in Ontario (12 clinics) and the United States (eight clinics).
Alaris has $54.8 million sunk into the company through preferred partnership units. In November 2014, the royalty stream stopped. The two companies have been working together to come up with a solution, which could involve as much as $28 million up front as well as some later rewards. Still, Alaris wrote off a big chunk of the original investment, just to be sure.
Investors were concerned about what this meant for the company’s dividend going forward. Alaris pays a monthly dividend of 13.5 cents per share, good enough for a 6.7% yield. For many investors, this dividend is the primary reason they own the stock. Any earnings surprise that puts that dividend into jeopardy is going to send many of them scurrying to the exits.
Bulls point to the fact this KMH fiasco was already well known, and investors are reacting to perceived threats to the dividend that will get sorted out. Bears say Alaris’s ability to pay dividends going forward could be permanently damaged.
Which camp is right? Let’s take a closer look.
2016 outlook
If you exclude the write off from the KMH exposure, the company’s 2016 hasn’t been so bad. Revenue and earnings are up nicely compared with last year, and on an annual basis Alaris is still on pace to be able to easily afford its dividend.
Through the first six months of the year, the company earned $0.75 per share in net cash from operating activities while paying out $0.81 per share in dividends. This ratio got investors a little excited, and rightfully so. No company can pay out more than it earns over a long period of time.
But on an annual basis, the company projects that the dividend is still quite affordable. The reason why the dividend hasn’t been covered by earnings over the first half of the year is twofold. First, the company was slapped with its annual tax bills to Alberta and the United States. And secondly, some $3.5 million of distributions were delayed. If these distributions had come as expected, the company’s cash flow would’ve been enough to cover the dividend.
Management even went as far as projecting the company would generate $2.11 per share in cash from operations for 2016 while paying out $1.62 per share in dividends. That’s good enough for a 77% payout ratio, which is very sustainable.
Analysts, meanwhile, aren’t quite as bullish, projecting the company will earn $1.78 per share in net income this year. Keep in mind, however, the difference between cash flow and earnings.
A true growth machine
Over the last five years Alaris has transformed itself from small player into a billion dollar company.
In 2011 the company earned $22.1 million annually in royalty payments from its partners, which translated into $17 million in cash from operations. That was about $1 per share, all of which went back to shareholders in the form of dividends.
Revenue then grew 45% in 2012, 64% in 2013, 31% in 2014, and 19% in 2015, with the company projecting another 24% growth in the top line in 2016. Earnings have gone up by a similar amount, and investors have been treated to dividend increases of nearly 60% since 2011.
You won’t find that kind of growth rate in many other Canadian stocks. And yet shares are trading for a fairly inexpensive valuation of just 13.5 time projected 2016 net earnings. That’s quite cheap for a stock with that kind of growth.
Plus, the sky is truly the limit for Alaris. As long as it can get the financing and find attractive royalty deals, it should be able to continue its growth path indefinitely.
Alaris is reasonably valued, has terrific growth potential, and looks like it can afford its generous 6.7% dividend. What more can an investor ask for?
