Why Have Alaris Royalty Corp. Shares Popped 8.5%?

Alaris Royalty Corp.’s (TSX:AD) dividend just became safer. Find out why.

| More on:
win

Earlier this month, I wrote that Alaris Royalty Corp. (TSX:AD) may finally be turning around. I think investors were most concerned about the sustainability of its dividend, which yielded north of 8% due to its compressed share price at the time.

The shares have popped 8.5% on Wednesday as of this writing. There’s no doubt it has to do with the news that improved the safety of its high yield.

Here’s a quick overview of what the business is about.

Alaris Royalty’s business overview

Alaris Royalty offers capital to private businesses that want to maintain the ownership in their companies but can’t get the capital they need from traditional means. In return, Alaris Royalty receives monthly cash distributions from them.

Alaris Royalty has about 70% of its investments in U.S.-based companies, which will benefit from the tax reform that will bring the corporate tax rate in the U.S. from 35% to 15% if the reform happens.

Why have Alaris Royalty shares jumped 8.5%?

I wrote in previous articles that Alaris Royalty can turn around by resolving the issues in four of its revenue streams and signing potential new streams.

On Wednesday, Alaris Royalty announced great progress on both fronts. First, the company will be receiving $9.8 million of cash proceeds and $20.7 million of secured notes from one of its problem streams, KMH. Alaris Royalty will also receive principal payments of about $80,000 per month on these notes starting July 15, 2017.

Second, Alaris Royalty has contributed US$20 million to a new partner, Accscient, which provides IT staffing, consulting, and outsourcing services, in exchange for US$3 million per year, which is a whopping yield of 15%.

Accscient will account for about 4% of Alaris Royalty’s annualized revenue. The contribution was funded by the KMH proceeds and Alaris’s revolving credit facility.

The new contribution will bring down Alaris Royalty’s payout ratio from about 97% previously to below 90%, which greatly improves the safety of its dividend.

Is there more room to run?

After the run-up, the shares now trade at a multiple of about 13, which is much cheaper than its long-term normal multiple of 20. That said, investors should require a big margin of safety in Alaris Royal shares before buying due to the problems we saw that it can face. With the latest developments though, the worst has probably passed.

Before today’s news, the analyst consensus at Thomson Reuters had a 12-month target of $23.40 on the stock, which represents about 7.5% of upside potential. With the latest developments, that target will likely be raised.

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

Specialty Brands faces higher raw materials costs.
Dividend Stocks

What’s Next for Premium Brands Stock?

Shares of the specialty food production and distribution company have fallen about 25% since last October.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

2 Interesting Buys in Any Market

Here are two intriguing buys in any market climate that offer defensive appeal as well as growth and income earning…

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

TFSA Investors: 3 TSX Stocks for Tax-Free Passive Income

These Canadian corporations have strong visibility over future earnings and dividend payouts.

Read more »

Simple life style relaxation with Asian working business woman healthy lifestyle take it easy resting in comfort hotel or home living room having free time with peace of mind and self health balance
Dividend Stocks

Lazy Landlords: 3 Cheap Canadian REITs to Buy in May 2022

You can become a passive landlord today by investing in Canadian REITs. Here are three cheap REITs to consider this…

Read more »

Target. Stand out from the crowd
Dividend Stocks

4 High-Yield TSX Stocks to Buy Ahead of Their Ex-Dividend Dates

If you have some cash lying idle, consider these high-yielding TSX stocks.

Read more »

growing plant shoots on stacked coins
Dividend Stocks

Passive Income: 3 TSX Stocks With Rapidly Growing Dividends

Worried about inflation? Here are three passive-income stocks to buy that pay rapidly growing dividends.

Read more »

Family relationship with bond and care
Dividend Stocks

Retirees: 4 Safe Stocks to Buy for Decent Passive Income

Retirees can offset the impact of runaway inflation by buying safe dividend stocks to create more cash flows.

Read more »

Canadian energy stocks are rising with oil prices
Dividend Stocks

3 Canadian Energy Stocks to Buy for Reliable Passive Income

Canadian energy stocks are gushing cash. Here's three top stocks that are perfect buys for reliable passive income.

Read more »