Alaris is a Canadian company providing preferred equity financing to private businesses across North America. The company uses a unique structure to service a niche in the private capital markets. It converted to an income trust on September 1, 2020, and changed its name from Alaris Royalty Corp. to Alaris Equity Partners Income Trust.
About 85% of Alaris’ investment is in U.S.-based companies and the balance 15% is in Canadian companies. Alaris focuses on business, healthcare, industrial, professional, construction, and IT services industries.
By industry, 38% of its investments are in business services, 33% in industrials, 22% in consumer products and services, and 7% in consumer financial services.
Alaris chooses to partner with companies having a steady flow of cash flows, proven management teams, and are non-capital intensive. Its interest in the partner companies could be in the form of a preferred partnership interest, other equity interest, loan, or ownership of intellectual property. The company provides cash financing to partners in exchange for a predetermined distribution.
- Opportunity Score: 55
- Ticker: TSE:AD.UN
- Sector: Industrials
- Industry: Conglomerates
- Market Cap: 0.76B
- P/E: 7.46
- Dividend Yield: 7.38%
- Payout Ratio (Earnings): 55.11%
- Canadian Dividend Aristocrat: NO
- Chowder Score: Members Only
- Dividend Growth: Members Only
- Dividend Growth Fit: 4/10
- Dividend Income Fit: 7/10
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Revenue Growth & Market Exposure
Alaris earns its revenues in the form of monthly cash distribution, for providing capital to private businesses. Over the last fifteen years of its existence, Alaris has created long-term partnerships with companies that have a proven track record of stability and secured cash flows.
These distributions are set for 12 months and adjusted annually based on the top-line results of the company partners rather than the residual equity interest in their net profits. Alaris exercises certain restrictive covenants in order to protect the ongoing payment of the distributions. The private company partners also prefer Alaris for its low-cost equity.
Alaris targets well-run, successful businesses for providing capital in return for monthly preferred equity distributions. The corporation has an impeccable history of partnering with 34 partners and investing $1.7 billion since its inception. Alaris is targeting to not have a single revenue stream generating more than 10% of total revenue in the long-term.
Alaris has continued to de-risk its portfolio over the past few years. The firm is looking at diversifying as well as growing its revenues by adding new partners and providing additional capital to existing partners each year. Year to date 2021, Alaris has deployed over $50 million.
Alaris has a sound track record of deploying capital into strong companies. The company has a huge growth opportunity as there are an estimated one trillion dollars of uninvested capital for conversion into potential deals. A unique structure and diversification across its partners are key competitive advantages for the company. Alaris is aiming to generate organic growth of 3%-5% per year.
As an income trust, Alaris pays a trust distribution rather than a corporate dividend at a rate of $0.31 per quarter. Since 2008 Alaris has provided consistent dividend income through its monthly dividend, and now, through trust distributions. It has an attractive dividend yield of almost 7.5% and a payout ratio of 83%.
However, the company is aiming to reduce its payout ratio to less than 70% in the future. The company last raised its dividend by 6.90% and has grown its dividend by more than 5% over the last decade. Alaris switched its dividend policy to a quarterly payment rather than monthly with the first quarterly dividend paid in July 2020. Since its inception, Alaris has paid over 150 consecutive monthly dividends totaling more than $475 million.
Alaris has an asset-light business model. The company has a strong balance sheet and generates enough cash to cover its debt. Alaris’ ability to generate large amounts of cash also supports the company’s future investments into lucrative businesses. The existing portfolio is generating an attractive baseline cash yield of 13%, with the potential for incremental growth.
Moreover, Alaris has exposure to market-leading businesses that are not available to traditional equity investors. The company makes sure that there is no loss of recurring payments as a result of its strategy of carefully screening its partners for quality. Alaris recapitalizes up to 75% of the equity in lower middle-market companies in North America.
The conversion to an income trust further simplified the cross-border investment structure and increased the amount of cash available for distribution. Alliance with strong partners with a proven performance track record, strong exposure to the U.S. economy, and royalty-based revenues are Alaris’ strong competitive advantages.
Alaris is in a good position to keep increasing its dividend as a result of growing distributions from new partners and positive resets. A solid footprint in the U.S. will also drive future earnings from a strong economy.
The private equity landscape in North America is very competitive. Alaris competes with a large number of private equity funds, mezzanine funds, equity and non-equity based investment funds, and royalty companies.
Alaris Royalty competes with Element Fleet Management Corp, goeasy Ltd., ECN Capital Corp, Chesswood Group Ltd, and Mogo Finance Technology. The company operates in a very competitive and rapidly changing environment.
Alaris enjoys a predictable as well as a secured stream of cash flows as it partners with well-established companies having a proven track record of generating free cash flow, and low levels of debt and capex requirement.
It is well-positioned to benefit from its robust investment pipeline and add to cash flow through accretive capital deployment. The company’s highly scalable business model with low overhead cost should support its future distributions.
However, the company’s stock price has not kept up with the indexes, and while the dividend is high and appears to be safe, the growth opportunity is completely missed. This is not a stock for my portfolio and the dividend growth doesn’t keep up with inflation to even consider it for a retirement portfolio.