It’s very tough to find a hidden jewel in the dividend space these days. Yield-hungry investors have almost tried and tested every dividend stock during the past decade as interest rates hit rock bottom and other income sources dried up. The Halifax-based Chorus Aviation Inc. (TSX:CHR), which owns Jazz Aviation L.P., which provides services to many small communities, is a small-cap stock you may have never heard of. Let’s find out if its attractive dividend yield makes it a good long-term investment. Business structure As the largest regional carrier in Canada, Jazz operates more…
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It’s very tough to find a hidden jewel in the dividend space these days. Yield-hungry investors have almost tried and tested every dividend stock during the past decade as interest rates hit rock bottom and other income sources dried up.
The Halifax-based Chorus Aviation Inc. (TSX:CHR), which owns Jazz Aviation L.P., which provides services to many small communities, is a small-cap stock you may have never heard of. Let’s find out if its attractive dividend yield makes it a good long-term investment.
As the largest regional carrier in Canada, Jazz operates more flights and flies to more Canadian destinations than any other airline. Jazz Aviation operates three divisions: Air Canada Express, Jazz Technical Services and Jazz.
Under a capacity purchase agreement (CPA) with Air Canada, Jazz provides service to and from lower-density markets as well as higher-density markets at off-peak times throughout North America, with a fleet of 117 Canadian-made Bombardier aircraft. Jazz Technical Services provides heavy maintenance, repair, and overhaul of Bombardier aircraft.
The company has a CPA with Air Canada, which is effective until 2025. Under the CPA, Chorus receives a fixed fee per aircraft, regardless of how often the plane is flown.
Chorus is not exposed to rising aircraft fuel prices, as price increases are passed through to Air Canada. This agreement provides Chorus with a degree of earnings stability.
In the second quarter, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 13% to $65.5 million from the same period a year ago, beating analyst estimates of $64.6 million.
The company’s newly established regional aircraft leasing subsidiary, Chorus Aviation Capital, is expected to provide a significant growth platform for the company, given its strong market fundamentals, including high demand and traffic growth, limited competition, and premium yields and margins.
“We’re making significant progress in growth and diversification as we build Chorus Aviation Capital into a leading regional aircraft lessor. Our objective is to become one of the top regional aircraft lessors in the world,” President and CEO Joe Randell said in the earning statement.
Should you buy Chorus?
The company pays a monthly dividend of $0.04 a share with an annualized dividend yield of 5.63%. The company has maintained its dividend at this level since early 2015.
Its stock performance suggests that the Street has been quite bullish on the company’s prospects. Chorus stock has gained 42% in the past year and is currently trading at $8.52 a share.
Though Chorus Aviation doesn’t have a long history of paying dividends, it has a utility-type revenue model; its earnings are almost guaranteed by Air Canada. This revenue structure makes this stock a good buy at least for the next eight years when this capacity agreement expires.
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Fool contributor Haris Anwar has no position in any stocks mentioned.