On the Toronto Stock Exchange, a Canadian income trust that lends its capital to private businesses in exchange for preferred and, more lately, common shares is drawing investors with an 8.24% yield. In mid-February 2024, a Motley Fool Canada analysis weighed whether that payout can be trusted and found good reason to think it can. The question sits at an old tension in investing: how much a steady return owes to disciplined selection, and how much it rests on the continued health of others' businesses.
Alaris Equity Partners: Is the 8.24% Dividend Yield Sustainable at a 21% Discount to Book Value?
Trading 21% below book value, with a dividend up 147% in five years
Mark
Why does a yield of 8.24% draw so much attention here?
Mimi
Because Alaris is an income trust, built to pay out regularly. The question is whether the cash coming in covers that payout, and the article argues it does.
Mark
What backs that up?
Mimi
Third-quarter revenue rose 10% to $47.2 million, EBITDA rose 110% to $83.9 million, and earnings per share rose 109% to $1.40. Book value per share went up $1.06 to $20.90.
Luke
Those are reported results, which is solid footing. But the article never shows the payout ratio or free cash flow against the $1.36 dividend, so "safe" is the author's conclusion, not a demonstrated figure.
Mark
What about the shift to common shares?
Mimi
The article says common shares have a higher internal rate of return, which helps in a higher-rate environment, while the screening criteria stay the same.
Luke
Common shares usually carry more risk than preferreds. The piece doesn't say how big that shift is, so I'd call the effect unknown.
Mark
And the 21% discount to book value?
Mimi
At $16.61 against a book value of $20.90, the units trade well below stated net worth.
Luke
A discount can mean the market sees an opportunity, or that it doubts the book value. The article doesn't say which. Also, the Q4 revenue of $39.9 million is an expectation, not a result.
Mimi
Fair. The 13-of-20 low-debt figure is the most concrete reassurance on risk.
O Pulso
- A strong quarter has lifted revenue, EBITDA and earnings sharply, and that jump is what makes the 8.24% yield look worth examining.
- Rising interest rates have pushed the trust toward common shares, a move that raises returns but adds exposure to the businesses it backs.
- The stock trades near $16.61, about 21% below a book value of $20.90 per unit, inviting the question of whether the market is pricing in trouble.
- The yield's safety now depends on whether cash flow keeps growing and whether the shift toward common shares holds up if rates stay high.
On the Toronto Stock Exchange, a Canadian income trust that lends its capital to private businesses in exchange for preferred and, more lately, common shares is drawing investors with an 8.24% yield. In mid-February 2024, a Motley Fool Canada analysis weighed whether that payout can be trusted and found good reason to think it can. The question sits at an old tension in investing: how much a steady return owes to disciplined selection, and how much it rests on the continued health of others' businesses.
Units of Alaris Equity Partners Income Trust were trading at $16.61 on the Toronto Stock Exchange, offering a yield of 8.24%. A Motley Fool Canada analysis from mid-February 2024 asked whether that payout can be relied on, and concluded that it probably can.
Alaris has long supplied capital to private companies, receiving preferred shares that pay dividends and carry a share in growth, without taking control of the businesses. More recently it has added common shares, which offer higher returns and help it compete when interest rates are elevated. The author notes that the investment discipline itself has not changed, and that discipline is what makes the dividend credible. Alaris favors firms with a long record of growing free cash flow, strong insider ownership, steady management, low debt and modest capital needs. Thirteen of its twenty investments carry debt below one times EBITDA, and many carry none.
The latest quarter provides the strongest evidence: revenue rose 10% to $47.2 million, EBITDA rose 110%, and earnings per share rose 109% to $1.40. Book value per share climbed to $20.90. Over five years the annual dividend has grown 147% to $1.36, a compound rate of about 20%.
The author concludes that Alaris will likely keep paying income investors. Still, the case rests on one strong quarter and a forward estimate, and whether the yield stays safe depends on cash flow continuing to grow and on how the move into common shares fares if rates remain high.
On the Toronto Stock Exchange, units of Alaris Equity Partners Income Trust (TSX:AD.UN) were changing hands at $16.61, paying a yield of 8.24%. A Motley Fool Canada analysis published in mid-February 2024 asks whether that payout can be trusted, and concludes that it probably can.
The case starts with what Alaris does. Historically, it has supplied capital to private businesses and received preferred shares in return. Those shares pay dividends, and they also give Alaris a share in the profit and growth of the companies. It does this through non-control equity stakes, so it participates in the businesses without running them.
More recently the trust widened its scope to include common shares. According to the analysis, common shares carry a higher internal rate of return, which helps Alaris stay competitive when interest rates are elevated. The author stresses that the change has not touched the trust's investment discipline, and that discipline is central to judging the dividend.
Alaris looks for companies with a long record of free cash flow growth, high insider ownership, and stable, continuous management. It also wants low debt and low capital expenditure needs. The aim, the author says, is to limit risk so the distribution stays safe. As an example, 13 of the trust's 20 investments carry a debt-to-EBITDA ratio below one, and many have no debt at all.
The most recent quarterly numbers are the second pillar of the argument. Revenue rose 10% to $47.2 million. EBITDA rose 110% to $83.9 million, and earnings per share rose 109% to $1.40. The quarter added $1.06 to book value per share, which now stands at $20.90.
Management's outlook is described as bullish, with the underlying investments continuing to perform well. For the fourth quarter, the article expects revenue of $39.9 million. That implies a 12-month run rate of $166.4 million, 5.8% above the $157.3 million run rate reported the previous quarter.
The dividend history is part of the pitch. Over the past five years, the annual dividend has risen 147% to the current $1.36 per share, a compound annual growth rate of 20%.
The author's conclusion is that Alaris will likely keep rewarding income investors, given its conservative approach to investing for income. At $16.61, the units trade 21% below book value, and return on equity is 14.4%. Whether the yield stays safe depends on cash flow continuing to grow and on how the shift toward common shares plays out in higher-rate conditions. Note that this is one analyst's reading, and it leans on a single strong quarter and a forward estimate.
Citações Notáveis
Alaris will likely continue to do well for income investors, given its conservative approach to investing for income.— Motley Fool Canada analysis (paraphrased)
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