Is Alaris Royalty Corp. About to Slash its Dividend?

What a volatile day it was for Alaris Royalty Corp. (TSX:AD)! It fell 12% on Wednesday. Is a dividend cut coming?

| More on:
The Motley Fool

Is Alaris Royalty Corp. (TSX:AD) about to cut its dividend? The market seems to think so. After releasing its second-quarter results, the shares fell more than 12% on Wednesday.

Alaris offers capital to profitable private businesses, which it plans to partner with for a long time. In exchange, Alaris receives monthly cash distributions from them.

There’s a problem with one of these revenue streams, namely KMH, which stopped paying regular distributions to the company in November 2014.

As a result, Alaris’s legal and accounting fees increased by 44.5% to almost $1.3 million in the first half of the year compared with the same period last year.

The increase in professional fees had to do with the review and monitoring of the KMH strategic process to protect the remaining value of the preferred units.

The most recent negotiations with KMH could result in about $28 million in an upfront cash payment. As well, Alaris recognized an impairment of $7 million through earnings in the second quarter.

In light of the temporary setback that Alaris is experiencing, investors should note the following.

Revenue diversification

Aside from KMH, Alaris still earns revenues from 15 other partners. Its top three partners contribute 38.8% of its total revenues, with contributions of 15.6%, 13.2%, and 10%, respectively.

Alaris aims to partner with businesses that provide required products or services in mature industries and have track records of generating free cash flows to improve distribution sustainability.

Additionally, Alaris earns 69% of its revenue from the U.S, which improves the safety of its dividend that’s paid out in the weaker Canadian currency.

Dividend

Since 2010 Alaris has increased its dividend per share at an average annual rate of 9.9%. As mentioned before, thanks to the stronger U.S. dollar compared to the Canadian dollar, Alaris’s payout ratio is about 77%, which is sustainable.

This payout ratio is based on the annualized expected revenue that excludes KMH, no change in the current dividend, no change in the share count, and no incremental revenue from new investments over the next 12 months.

Strong balance sheet

At the end of June Alaris had current assets of $36.5 million, of which $11 million of cash alone covered the $8.1 million of current liabilities, which included $4.9 million of dividends payable.

Strong insider ownership

Directors and officers of the company own about 10% of Alaris based on the diluted share count. So, their interests are aligned with that of shareholders, and they wouldn’t want a dividend cut either.

Conclusion

As stated in Alaris’s July presentation, “Alaris’s long-term goal is to create the optimal dividend stream available for investors.”

At about $25.60 per share, Alaris yields 6.3%. With shares down 12%, the risk to invest in Alaris has been lowered. Additionally, there’s no immediate danger to the dividend as the payout ratio is less than 80%, and the company continues to earn revenue streams from 15 partners.

Alaris can also easily meet its obligations. At the end of June Alaris’s available cash more than covered its current liabilities, including the amount needed for the dividends it declared.

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 »