Is This 7.3% Yield Too Good to Be True?

Can Alaris Royalty Corp. (TSX:AD) stay on its shareholders’ good sides by at least maintaining its yield?

| More on:
The Motley Fool

Income investors love dividends, but when the share price of a stock declines so much that it yields north of 7%, they start questioning if a dividend cut is on the horizon.

The share price of Alaris Royalty Corp. (TSX:AD) has dropped 18% in the last year, and the company now offers a giant yield of 7.3%.

If Alaris’s dividend is sustainable, it may be a great opportunity to buy shares at a juicy yield after a year-long pullback.

Before discussing if Alaris’s dividend is sustainable, let’s first see if it’s the right business for you.

The business

Alaris offers capital to private businesses that wish to maintain the ownership in their companies. These partners have a history of generating strong cash flows, and Alaris receives monthly cash distributions from them.

Alaris has 70% of its investments in the United States and 30% in Canada. By industry, roughly 35% of its invested dollars are exposed to business and professional services, 34% are exposed to industrials, 22% are exposed to health care, and 9% are exposed to consumer discretionary.

question mark

Is Alaris’s dividend sustainable?

Historically, its growing cash flow per share allowed it to grow its dividend per share at an average annualized rate of 14% over five years.

However, since the summer of 2015 Alaris’s monthly dividend has stayed at 13.5 cents per share. This has prompted questions about whether its dividend is safe or not, as a growing dividend is perceived to be safer than a stagnant one.

Due to deferred distributions from selective revenue streams, Alaris’s payout ratio is expected to be about 101% this year.

That said, there are multiple events that can reduce its payout ratio, including debt reduction to lower interest costs, one or more of its problematic streams start making distributions again, and new capital deployment to increase cash flow.

Using a reasonable assumption that Alaris could deploy $79 million this year (whereas its average capital deployment per year since 2011 has been $120 million and as low as $77 million in a single year), Alaris’s payout ratio can be reduced to less than 92%.

Indeed, Alaris has $80 million available to invest. The company could also receive up to $120 million from its partners via expected exit events or repayment of short-term capital over the next year.

Investor takeaway

Right now, Alaris’s payout ratio is unsustainable. However, it’s likely that it can reduce its payout ratio to about 92% over the year. Still, that payout ratio may be cutting it too close for conservative income investors.

Since the shares aren’t dirt cheap, it’s probably wise to stay away. If they fall to $18-20, adventurous investors can consider picking up some shares.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of ALARIS ROYALTY CORP.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »