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Brookfield Business (TSX:BBU) vs. Alaris Royalty (TSX:AD): Which Stock Will You Invest in?

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On reviewing Alaris Royalty (TSX:AD) stock, I found similarities between its business and Brookfield Business Partners’s (TSX:BBU.UN)(NYSE:BBU).

I’ve been attracted to Alaris Royalty’s big dividend before. However, I prefer to invest in Brookfield Business Partners, despite Alaris being likely to deliver greater total returns. Here’s why.

Alaris’s business

Alaris lends money to private businesses mostly in the form of non-voting preferred equity. In return, it receives massive monthly cash distributions that typically yield about 14%. In turn, Alaris pays out most of the cash distributions in the form of big dividends to its shareholders.

However, when the underlying private businesses run into trouble, they fail to or pay much less cash distributions to Alaris. This causes Alaris to cut its dividend, as it has in the past.

Thinking deeper … who actually borrows money to have to pay creditors super-high interests? So, it should be quite obvious that Alaris is a high-risk investment.

Alaris’s investments are divided across these industries: 38% in industrials, 28% in business services, 26% in consumer products and services, and 9% in consumer financial services.

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Brookfield Business Partners’s business

Brookfield Business Partners also invests large amounts of money in businesses. Unlike Alaris, BBU takes the ownership approach by taking meaningful economic interests in the businesses.

After that, BBU essentially applies its global investing and operational expertise to improve these businesses with the goal of sustainable profitability and cash flow.

BBU’s businesses are divided as follows based on assets: 44% in industrials, 35% in business services, and 21% in infrastructure services. Geographically, its assets are divided as follows: 42% in North America, 31% in Europe and the Middle East, 15% in the Asia Pacific, and 11% in South America.

BBU profits from cash distributions and the sale of mature businesses after it has worked its mojo.

You can imagine that BBU’s business model has a much higher rate of success than Alaris’s. Specifically, BBU targets annualized returns of 15-20% on its investments.

BBU pays a small yield because it retains most of its profits to invest in businesses. So, investors should focus on price appreciation when investing in BBU.

The Foolish bottom line

In this market crash, both BBU and Alaris have become very cheap.

BBU stock trades at a substantial discount of 42% from analysts’ average 12-month price target at US$25.05 per share at writing.

At $7.86 per share at writing, Alaris stock trades at a discount of 46% from analysts’ average 12-month price target. I suspect after a potential dividend cut in June, Alaris’s forward yield would be 12.6%.

Based on these estimations, an investment in Alaris could double one’s investment in a year, while BBU could deliver total returns of about 74%.

Between BBU and Alaris, I prefer to invest in the former, because its business model takes a proactive approach. It’s also a decision to be an owner versus a creditor, much like the decision to invest in stocks or bonds.

Importantly, it’s critical to be an active investor in BBU. Because BBU pays a small yield, investors would only get the motherload of returns from price appreciation. In other words, investors must opt to buy low and sell high in BBU.

In contrast, you can buy low in Alaris stock and hold the stock for however long you want, because it pays out juicy income as a big portion of its total returns.

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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 shares in BBU. The Motley Fool recommends ALARIS ROYALTY CORP.

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