Royalty companies generally offer shareholders a tasty dividend yield as they distribute a significant portion of their profits to investors. An asset-light model and stable cash flows allow royalty stocks to maintain dividends across market cycles. In addition to consistent dividend payouts, you can also benefit from long-term capital gains.
Here’s one such royalty-based TSX dividend stock that offers a forward yield of over 8.5%.
An overview of Diversified Royalty
Valued at a market cap of $478 million, Diversified Royalty (TSX: DIV) offers shareholders an annual dividend of $0.25 per share, translating to a yield of 8.6%. Diversified Royalty is a multi-royalty company engaged in the business of acquiring top-line royalties from multi-location businesses and franchisors in North America.
DIV aims to acquire predictable, growing royalty streams from businesses and franchisors. Its royalty partners are Mr. Lube, AIR MILES, Sutton, Mr.Mikes, Nurse Next Door, Oxford Learning Centers, Stratus Building Solutions, and BarBurrito. Each royalty partner is part of a different industry and has different geographic exposure.
Diversified Royalty wants to increase cash flow per share by focusing on accretive royalty purchases and the growth of these purchased royalties.
Diversified Royalty acquired BarBurrito
In October 2023, Diversified Royalty announced the acquisition of trademarks and other intellectual property used by BarBurrito Restaurants, adding an eighth royalty stream for the company.
The acquisition deal was priced at $72 million and will add $8.3 million in annual revenue, indicating an acquisition multiple of 8.4 times. Its royalty sales will grow by 4% annually for the next seven years, after which it will fluctuate based on gross sales of locations in the royalty pool.
BarBurrito was founded in 2005 and has more than 260 quick-service restaurants in Canada. Most of the locations are franchised, and future growth will largely depend on the opening of additional locations.
BarBurrito reported system-wide sales of $135 million in fiscal 2023 and expects the metric to surge to $180 million in fiscal 2024.
How did Diversified Royalty perform in 2023?
In 2023, Diversified Royalty reported revenue of $56.5 million, an increase of 25% year over year. Its distributable cash stood at $38.1 million, an increase of 18% compared to the year-ago period, indicating a payout ratio of 84.2%, which is reasonable.
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In May 2023, five new locations were added to the Mr. Lube royalty pool. Moreover, the acquisition of BarBurrito also resulted in steady growth for the royalty company last year.
Diversified Royalty has increased sales from $30.49 million in 2020 to $56.5 million in 2023. Its operating income has almost doubled from $26.5 million to $50.7 million in this period.
What is the target price for DIV stock?
Analysts tracking DIV stock expect sales to rise by 20.5% to $68 million, while adjusted earnings might remain flat at $0.21 per share. Priced at 13.9 times forward earnings, DIV stock trades at a cheap multiple and should deliver outsized gains to shareholders.
Analysts remain bullish on the TSX dividend stock and expect shares to surge by 35% in the next 12 months. After adjusting for dividends total returns will be closer to 43%.
