Alaris Royalty Corp. (TSX:AD) is a Canadian company that provides finance to private companies, typically in the form of a preferred limited partnership interest or long-term license and royalty arrangements. The stock currently yields a whopping 7% that may attract the attention of income investors looking to give themselves a nice raise.
Desjardins expects Alaris to perform well due to its strong capital deployment for new investments. The company also has a new strategy to drive incremental growth, which should be able to lower the company’s payout ratio over the long term.
The stock has been on a roller-coaster ride downward over the last three years. Many pundits believe the company has an above-average risk level because it has no control over the private firms which it partners with. The company has been seeing issues arise out of a few of its revenue streams. Approximately 19% of its distributions are deferred, and it’s a big question mark as to when Alaris will receive its distributions.
What if some of Alaris’s royalty investments turn out to be duds? The company may never see distributions from some of its partners, and if this happens, the dividend may be brought down.
KMH is an example of a partner that hasn’t been the best for Alaris to deal with. KMH is a healthcare company that operates diagnostic clinics across Canada and the U.S. The company hasn’t paid distributions since 2014 because it is experiencing financial difficulty. Alaris has been doing everything it can to recapitalize the firm, but the fact of the matter is, it made a poor investment decision to begin with.
Another problematic partner is Agility Health, which is a physical and occupational therapy service provider. Agility Health is in big financial trouble, and it’s quite possible that Alaris will not get its full US$20.1 million investment back. Alaris also claims that Agility Health broke the terms of an agreement. There’s no question that loaning Agility Health money was a big mistake which the management team at Alaris should treat as a lesson learned.
There’s no question that Alaris made some bad decisions in the cases of KHM and Agility Health, and this could put some pressure on the current dividend payout. I don’t think the company will slash its dividend anytime soon, but it’s definitely not good to have a payout ratio near the 100% level.
The company has an impressive track record of dividend growth over the last nine years, and I suspect the management team will do everything they can to keep its dividend static.
The stock currently trades at a 12.98 price-to-earnings multiple and a 1.3 price-to-book multiple, both of which are lower than the company’s five-year historical average multiples of 22.3 and 1.9, respectively. The stock is dirt cheap at current levels, so it may be worthwhile to consider picking up shares. The stock has been quite volatile over the past few years, so make sure you buy in small chunks on any further dips.
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Fool contributor Joey Frenette has no position in any stocks mentioned.