As dividend yields and share prices are inversely related, investors can consider buying beaten-down stocks with inflated yields to generate a steady stream of recurring income. However, dividend stocks with high yields are likely to be a value trap rather than solid long-term investments.
So, you still need to analyze a company’s fundamentals to see if its dividend payout is sustainable across business cycles. One such high dividend TSX stock is Alaris Equity Partners (TSX: AD.UN), which is down 31% from all-time highs, offering you a tasty yield of 8.5%. Let’s see if this dividend stock is a good buy right now.
An overview of Alaris Equity Partners stock
Alaris recapitalizes up to 85% of the equity in lower middle market companies based in North America. It generally invests via preferred equity investments in companies that generate cash flows of at least $4 million. The transaction size of its investments ranges between $20 million and $100 million in return for a monthly cash distribution on the new preferred equity position.
Business owners use the capital for a variety of reasons, including organic growth, acquisitions, recapitalization, and buyouts. Further, business owners can keep voting control of their companies as Alaris uses non-voting shares and does not require board representation.
Alaris does not rely on an exit to generate returns, and its preferred shares are entitled to a regular dividend, which depends on the top-line results of the company and may fluctuate each quarter.
The primary aim of Alaris Equity Partners is to create an optimal income stream for its shareholders by offering access to a unique asset class. Its unique investment strategy combines equity-like returns with debt-like protections.
Moreover, the fund’s existing portfolio is generating an attractive baseline cash yield of 13% with the potential for incremental gains via capital appreciation.
What is the target price for Alaris Equity Partners stock?
Alaris operates a highly scalable business model with low overhead costs. Its EBITDA (earnings before interest, tax, depreciation, and amortization) margins typically range over 80%, allowing it to offer a high dividend payout to investors.
Alaris currently has over 20 partners with historical organic revenue growth between 1% and 6%. Around 90% of its investments are in companies based out of the U.S., which is the world’s largest economy. Its portfolio of investments is well diversified, with business services accounting for 39%, followed by consumer products at 25%, industrials at 24%, and consumer financial services at 12%.
Alaris Equity Partners has invested $2.2 billion across 40 partner companies to date. It has collected more than $1.2 billion in distributions and received $850 million of capital through exit events or repurchases. In the last five years, it has deployed $200 million of gross capital and has invested $130 million in 2023.
Alaris has increased sales from $100 million in 2018 to $190 million in 2022 and is forecast to end 2023 with sales of $195 million. Priced at less than eight times forward earnings, the TSX stock is quite cheap, given its generous dividend yield.
It ended 2022 with a payout ratio of 39%, allowing it to maintain dividend distributions even if financials deteriorate in the near term. Analysts remain bullish and expect shares to gain 24% in the next 12 months.
