The turbulent equity markets in 2020 have decimated several stocks. Investors with high exposure to energy, retail, and financial sectors have experienced a decline in portfolio value. But this sell-off has also meant that dividend yields are attractive for income investors. We know that stock prices and dividend yields move in opposition to each other.
In a volatile macro-environment, it is good to have a predictable stream of cash flows. With interest rates nearing record lows, bonds are no longer a viable option. Dividend stocks remain popular for a reason. They provide investors with regular income as well as the opportunity to grow wealth via capital appreciation.
We’ll look at one such dividend-paying stock trading on the TSX, Alaris Royalty (TSX:AD). Shares of Alaris have fallen by a considerable 57% in the last three months. It has underperformed the iShares S&P/TSX 60 Index ETF by a huge margin in 2020, as we can see in the below chart.
This pullback has meant that Alaris stock has a forward yield of close to 12%. This indicates a $1,000 investment in Alaris will generate close to $120 in annual dividend payments.
A look at the company’s business model
Alaris Royalty provides capital to profitable Canadian companies in exchange for monthly cash distributions. Alaris claims that these distributions are set a year in advance and are based on the yield of its investments.
Alaris recently announced its first-quarter results and reported record revenue of $34 million. It generated $9.8 million from the sale of the Sales Benchmark Index LLC in January 2020.
The COVID-19 pandemic has weighed heavily on four out of 12 Alaris Royalty businesses. Companies such as Planet Fitness and Body Contours had to shut shop due to country-wide lockdowns.
However, the coronavirus pandemic is likely to be a near-term headwind. This means revenues from companies should recover in the second half of 2020. According to data from Yahoo! Finance, analysts expect Alaris Royalty’s revenue to fall 11.8% to $102.26 million in 2020. Comparatively, its earnings per share might fall by a massive 38%.
Analysts expect sales to grow 11.2% to $113.8 million in 2021 while earnings growth is estimated at 19.6%. This indicates Alaris stock is trading at a forward price-to-earnings multiple of 7.2. Its price-to-sales multiple stands at 3.5, while the price-to-book ratio is 0.6.
We can see that Alaris stock is trading at a reasonable valuation given its estimated earnings growth and high dividend yield.
Is the dividend yield sustainable?
Alaris Royalty had to cut its dividends by 30% in Q1. There is a fear of a second wave of coronavirus infections that might hurt businesses for longer than estimated. Investing in Alaris stock is a high-risk, high-reward scenario. Analysts tracking the stock have a 12-month average target price of $12.35, which is 25% higher than the current price.
When you account for its dividend yield, the 12-month returns can touch 37%. Over the long term, Alaris aims to diversify its investments, which will not only increase revenue streams, but also mitigate the risk of shareholders.
This stock has already gained 70% in the last two months. Since 2008, it has more than doubled investor returns, despite the significant correction in 2020. Income investors with a high-risk appetite can consider investing in this dividend stock.
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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.
The Motley Fool recommends ALARIS ROYALTY CORP. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.