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.
