Investing in quality royalty companies can help Canadians create a steady stream of dividend income at a low cost in November 2024. Generally, royalty companies are asset-light and benefit from high profit margins, allowing them to distribute most of their earnings to shareholders via dividends.
One such TSX royalty stock is Alaris Equity Partners Income Trust (TSX: AD.UN), which offers you a tasty forward dividend yield of 7.2%. Valued at a market cap of $866 million, Alaris is a private equity company specializing in management buyouts, growth capital, and mature investments, among others. Let’s see if this TSX stock should be a part of your dividend portfolio right now.
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Is Alaris Equity Partners stock a good buy?
Alaris Partners invests in multiple industries that offer you diversification. It aims to invest in companies raising capital for partial liquidity, generational transfer, recapitalization, and growth. Notably, it avoids investing in turnaround and start-ups or with companies with a declining asset base, such as oil and gas.
Alaris provides private businesses with alternative financing in exchange for royalties or distributions, aiming to generate stable and predictable cash flows for dividend payments to shareholders. It seeks to invest between $5 million and $100 million in companies with an enterprise value between $10 million and $400 million.
These companies are located primarily in the U.S., Canada, and Europe and generate EBITDA (earnings before interest, tax, depreciation, and amortization) between $5 million and $50 million. Moreover, Alaris makes small-cap investments of up to $20 million in private companies with a historical EBITDA of over $2 million.
Alaris explains that the distribution it receives is set a year in advance based on the initial yield on the investment and adjusted annually based on performance metrics such as net sales or gross profits.
Over time, Alaris is focused on diversifying and increasing its revenue streams by expanding its partner base and providing follow-on capital to existing partners. Alaris expects to generate organic growth of between 3% and 5% each year within its current revenue streams.
What is the target price for the TSX dividend stock?
Alaris has a unique business model that combines equity-like returns with debt-like protections. Its existing portfolio generates a baseline cash yield of 13%, with potential gains from capital appreciation. Its highly scalable business and low operating costs allow Alaris to report EBITDA margins of over 80%. With an experienced management team, Alaris has demonstrated a track record of generating realized returns of over 16% on exited investments.
Since its inception, Alaris has invested $2.4 billion in 41 partners across +100 tranches. Comparatively, it has collected over $1.4 billion in distributions and received $940 million of capital through exit events. In the first nine months of 2024, Alaris has deployed $139 million of capital, surpassing its total investments of $130 million last year.
In the third quarter of 2024, Alaris Equity increased its partner revenue by 39.7% year over year to $65.9 million. Comparatively, adjusted EBITDA rose by 12.4% to $90 million, while distributable cash flow grew by 63.5% to $32.8 million or $0.72 per share. Given its quarterly dividend payment of $0.34 per share, Alaris has a payout ratio of less than 50%.
Priced at just 4.5 times trailing earnings, the TSX dividend stock trades at a 20% discount to consensus price target estimates.
