Chorus Aviation (TSX:CHR) stock traded at the $8 per share level not too long ago. At writing, it trades at $2.74 per share and is so far maintaining its monthly dividend, such that it provides a ridiculously high yield of 17.5%.
Generally speaking, high yields of 10% or higher are not trustworthy. It’s therefore better to consider the stock for total returns, which is a combination of price appreciation and dividends.
First, here’s an overview of the business.
Chorus Aviation: Quick business overview
Chorus Aviation provides integrated regional aviation services, including aircraft leasing and support services.
Its 2019 revenue was $1.37 billion. Over 90% of sales came from regional aviation services and the remainder from regional aircraft leasing.
The regional aviation services segment includes contract flying and maintenance, repair, and overhaul services (e.g., part sales and technical services).
Its 2019 net income was $133 million, while its EBITDA was $370 million.
Chorus Aviation stock: Is the dividend safe?
Chorus Aviation stock’s latest announced monthly dividend translates to an annualized payout of $0.48 per share.
In 2019, the stock paid out $55.3 million in dividends, which was supported by a payout ratio of about 79% of earnings and 21% of operating cash flow.
However, the company tends to have negative free cash flow due to the high capital expenditure requirements of its business.
Therefore, it’s quite possible that it will have to cut its dividend at some point.
Should you invest in Chorus Aviation stock?
Analysts have an average 12-month price target of $7.36 per share for Chorus Aviation stock. This means that assuming the stock eliminates its dividend, the stock can still be a multi-bagger by appreciating 168%.
Chorus Aviation’s debt-to-equity ratio of 3.9 times and debt-to-asset ratio of 79% are at the high end.
Moreover, in the near to medium term, there will probably be lower demand for regional aviation services.
Some investors might invest in Chorus Aviation for its price appreciation potential. However, there are other wonderful businesses to buy in today’s market for safer income and returns.
Safer dividend stocks
Conservative investors should find bank, telecom, and utility stocks to be much safer investments for dividend income. Moreover, thanks to the market crashes, they trade at compelling valuations and provide juicy passive income.
At about $64 per share, Canada’s fourth-largest bank, Bank of Montreal, trades at about 6.7 times earnings and offers 73% near-term upside potential and a 6.6% yield!
For a juicy yield of nearly 6.6%, consider BCE, one of Canada’s largest telecoms, at about $51 per share, which is about 14.3 times earnings.
At about $46 per share, a top North American regulated utility, Fortis, trades at roughly 17.2 times earnings and offers a safe yield of about 4.2%.
The Foolish bottom line
Chorus Aviation stock is trading at very cheap levels. At $2.74 per share, it trades at about four times earnings. Although its dividend is not sustainable, the stock can still more than double from current levels on a turnaround for patient investors.
Conservative investors are better off seeking safer dividend income and eventual price appreciation from bank, telecom, and utility stocks such as BMO, BCE, and Fortis. These stocks offer safe yields of roughly 4-7%.
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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 has no position in any of the stocks mentioned.