Is This ~10% Yielding Royalty Collector Ripe for Picking?

Alaris Royalty Corp. (TSX:AD) is a cheap high-yielding stock with a seemingly safe FCF payout. Is it time to buy today?

Alaris Royalty Corp. (TSX:AD) has been an unloved stock for nearly five years now. Today, shares are down over 53% from its all-time high, offering investors a bountiful ~9.6% dividend yield that has swelled to artificially high levels due to the stock’s massive multi-year fall.

The company provides capital to and collects royalties from private firms that were “hand-picked” by management. Simple to understand business with a 100% sustainable dividend, right? Not quite and here’s why.

Is the dividend really safe? 

As you would imagine, a capital provider to private equity firms doesn’t typically lock in capital expenditures, so its free cash flow is often the same as its operating cash flow, a majority of which goes toward paying its dividend. Alaris’ payout ratio has typically surged well above 100%; however, its FCF payout ratio has remained below 100% over the years, which is a good sign. But there’s very little wiggle room should one of Alaris’ partners become increasingly delinquent when it comes to royalty payments.

As such, an insolvent partner would mean Alaris would suffer and investors could see their dividend payment suddenly shrink at some point. Personally, I think neither payout ratio nor FCF payout ratio tells us much about the sustainability of the company’s dividend.

Instead, it’d be a more prudent decision for investors to look at each individual company and ask themselves if they’d personally invest money in each private firm. If the answer is no because of potential industry-wide headwinds that may cause insolvency or if you simply don’t understand some of the royalty partners, I’d steer clear of Alaris as a whole.

Without at least analyzing each one of Alaris’ partners, you’d be placing all your trust in the management team, which I don’t think is an effective investing strategy.

Sure, the FCF payout ratio has remained below 100%, but there appears to be very little wiggle room should another partner have payment difficulties; thus, the long-term sustainability of the dividend remains a huge question mark for investors. You’d have to look at the sum of the parts to come up with a realistic projection.

The company’s partners range from mining to IT consulting, so investors would be wise to not jump to conclusions by believing the dividend is safe because the FCF payout ratio has been sustainable over the past five years.

Given this, there’s no shame in sticking within your circle of competence. When it comes to Alaris, I believe investors will need an incredibly large circle of competence (and time to do their homework) in order to truly understand what they’re investing in. Because in the end, your capital goes toward these private businesses. If they unexpectedly become insolvent, you’ll take a hit, whether it’s through continued share price depreciation or an unexpected and unforeseen dividend reduction at some point down the road.

Furthermore, I’m also not a fan of the broad range of sectors that Alaris invests in, as I believe this introduces a substantial amount of risk to any portfolio. I’d be more confident investing in a firm that specializes in a specific industry rather than across an incredibly broad range.

Bottom line

I wouldn’t recommend making an attempt to grab this falling knife unless you’re able to understand the businesses of each of its partners. This appears to be too much homework for most investors, however. As such, I’d strongly urge investors to look elsewhere and not solely rely on management’s abilities.

Alaris is a really cheap stock at just one times book value and could be ripe for a rebound. However, due to the intricacies of the various businesses it collects royalties from, I’d rather not take a chance on something I don’t fully understand. “Invest in what you know” is a mantra that I’d recommend to the average investor.

Stay hungry. Stay Foolish.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

More on Investing

Child measures his height on wall. He is growing taller.
Energy Stocks

Down 16% and Paying 5.8%: The Case for Buying Enbridge Now

Understand how Enbridge is positioning itself in the energy sector during uncertain times with significant capital investments.

Read more »

worker carries stack of pizza boxes for delivery
Investing

Why I’m Sticking With This Dividend Stock Through Volatility

Restaurant Brands International (TSX:QSR) is a standout dividend grower still worth holding amid recent industry troubles.

Read more »

Happy shoppers look at a cellphone.
Investing

Can Aritzia Stock Stay This Hot?

With continued geographic expansion, digital investment, and strong customer demand supporting its growth trajectory, Aritzia can sustain its upward momentum,…

Read more »

panning for gold uncovers nuggets and flakes
Stocks for Beginners

Gold Pulled Back From Its Record: This Royalty Stock Raised Its Dividend 18%

OR Royalties offers a different way to own gold exposure, with strong dividend coverage and a modest starting yield.

Read more »

Data center servers IT workers
Retirement

CPP and OAS Alone Probably Won’t Cover Retirement: How to Fill the Gap

Prepare for retirement by understanding the limits of CPP and OAS for your financial future. Stay informed and secure.

Read more »

House models and one with REIT real estate investment trust.
Dividend Stocks

A Perfect TFSA Stock: An 8.4% Payout Each Month

GO Residential REIT pays cash monthly and yields about 8.2% annually. Learn what backs the payout, the H&R deal, and…

Read more »

Data Center Engineer Using Laptop Computer crypto mining
Energy Stocks

I’m Watching Hammond Power’s Backlog, Now Nearly Double Last Year’s

Hammond Power's revenue backlog is up 96.9% YoY on AI data centre demand. Here's what to watch ahead of Q3…

Read more »

Forklift in a warehouse
Dividend Stocks

The Best Monthly Paying Dividend Stock on the TSX: My Pick and My Buy Price

Granite combines monthly income with a reported payout cushion, while an $80 buy price improves what a new investor receives.

Read more »