Investing in dividend stocks is a good strategy if you can consistently find quality companies that offer an attractive payout to shareholders. It’s crucial to delve into the financials of a company to analyze if its dividends are sustainable across market cycles.
One popular TSX dividend stock is Alaris Equity Partners Income Trust (TSX:AD.UN), which currently offers a forward yield of 8.3%. Let’s see why I’m bullish on this high-dividend Canadian stock right now.
An overview of Alaris Equity Partners
Valued at a market cap of $750 million, Alaris Equity Partners is a private equity company that specializes in management buyouts, growth capital, and other such investments. It does not invest in start-ups or turnarounds and avoids investing in those with a declining asset base, such as oil and gas companies.
Typically, Alaris invests in companies raising capital for partial liquidity, recapitalization, and growth. These investment companies do not experience large cyclical swings and are majorly individually-owned or family-controlled. Alaris Royalty provides alternative financing in exchange for royalties or distributions with the aim of generating stable and predictable cash flows for dividend payments to shareholders.
Over the years, Alaris Equity has invested in economically developed regions, including Canada, the U.S., and Europe. Its investments range between $5 million and $100 million in companies with enterprise values between $10 million and $400 million. These companies have low debt levels and generate consistent profits.
Alaris also explained it makes small-cap investments up to $20 million in private companies with EBITDA (earnings before interest, tax, depreciation, and amortization) of $2 million. Moreover, Alaris emphasizes that it prefers to make non-control equity investments in its portfolio companies.
How did Alaris Equity perform in Q3 of 2023?
Alaris Equity reported revenue of $47.2 million in the third quarter (Q3) of 2023, an increase of 10% year over year. In the last three quarters, it deployed $130.1 million in multiple companies, which yielded annual contracted distributions of $13.4 million, or $0.30 per unit.
Its Q3 results showcase the strength of the company’s diversified portfolio. As investor sentiment improved, Alaris experienced an increase of $40 million in the fair value of its investments.
Alaris generated earnings of $1.40 per unit and paid $0.34 in distributions per unit. These payouts have risen by 10% in the last two years.
What’s next for this TSX dividend stock?
Alaris has a unique investment strategy that combines equity-like returns with debt-like protections. Its existing portfolio generates an attractive baseline cash yield of 13% with the potential for incremental growth as well as gains from capital appreciation.
A highly scalable business model with low overhead costs allows Alaris to enjoy EBITDA margins in excess of 80%. Historically, Alaris has generated annualized returns of more than 16% on exited investments.
Alaris offers shareholders access to a differentiated asset class and a way to invest in high-quality, industry-leading private companies that previously could be accessible only by high-net-worth individuals.
Analysts tracking Alaris forecast its adjusted earnings at $2.33 per share in 2023. So, the TSX stock trades at seven times forward earnings, which is very cheap. Bay Street also expects Alaris stock to gain 20% in the next 12 months.