Alaris Equity Partners Income Trust: Is its 8.24% Dividend Yield Safe?

Alaris Equity Partners has a history of strong dividend income generation for its shareholders. It’s also trading 21% below book value.

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When we look for high-yield stocks, we often come across income trusts. This is because the very purpose of the income trust is to provide income for its shareholders. As a result, they hold income-producing assets and are designed to distribute income on a regular basis. In this article, I will take a look at Alaris Equity Partners Income Trust (TSX:AD.UN) to evaluate whether its 8.24% dividend yield is safe and reliable.

In turn, this will inform us on whether Alaris stock (AD.UN) is a good buy. Let’s look into it.

What does Alaris Equity Partners do?

Historically, Alaris has provided capital to private businesses. In return, it holds preferred shares, which collect dividends, as well as participates in the potential profit and growth of these companies.  The relationship is such that Alaris participates in the businesses through non-control equity ownership. 

More recently, in a bid to increase its total return profile, the trust has widened its investment scope to include common shares. These shares have a higher internal rate of return, and thus help keep Alaris competitive in this higher interest rate environment.

Alaris’ guiding principles

But this change has not altered Alaris’ guiding investment principles. These principles and discipline are part of the key considerations when looking into the reliability of the trust’s dividend.

Alaris has very specific things it looks for in any potential investment. This includes a long record of free cash flow growth, a high level of insider ownership, and management stability and continuity. Also, any company that Alaris invests in must have low debt levels and low capital expenditure requirements.

So, you can see that Alaris goes into this whole exercise with the goal of minimizing risk so that its dividend will be safe. For example, 13 of the company’s 20 investments have a debt-to-EBITDA ratio of less than one, with many having no debt at all.

Q3 results show strength

Turning to Alaris’ most recent quarterly result, we can see that momentum is strong. Revenue increased 10% to $47.2 million, EBITDA increased 110% to $83.9 million, and earnings per share increased 109% to $1.40. All told, the quarter resulted in a $1.06 bump in the trust’s book value per share, which now stands at $20.90.

Looking ahead, management’s outlook remains bullish as the company’s investments continue to perform well. In Q4, we can expect the company to post revenue of $39.9 million, for a 12-month run rate of $166.4 million. This is 5.8% higher than the 12-month run rate of $157.3 million last quarter.

As in the past, these strong and steady results will continue to fund the trust’s strong and steady dividend. In fact, in just the last five years, Alaris’ annual dividend has increased 147% to the current $1.36 per share. This represents a compound annual growth rate of 20%.

The bottom line

My conclusion is that Alaris Equity Partners Income Fund will likely continue to do well for income investors. It’s predicated on a conservative approach to investing for income, while AD.UN stock is trading at only $16.61 per share, or 21% below its book value. Furthermore, its return on equity is quite strong, at 14.4%.

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 Karen Thomas has no position in any of the stocks mentioned. The Motley Fool recommends Alaris Equity Partners Income Trust. The Motley Fool has a disclosure policy.

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