Alaris Royalty Corp (AD.TO)

They are a royalty company. The challenge is what you pay for those royalties and whether those royalties actually pan out. The stock has been recovering since they stumbled about 9 months ago. He was short, but he isn’t any more as it isn’t a particularly good short any longer at 1.2 times book value. Their balance sheet is fine and they recently beat on earnings. They only thing keeping him from buying it is price momentum. The yield seem sustainable, though.

The main issue is that they have some portfolio problems. 3 or 4 of their investments are underperforming. The company is working on it. The dividend was cut in 2009 so it is not completely safe. You could see one of the investments being written off, or you could see them make new royalty investments to dilute the bad companies.

A tremendous company that over the longer-term has delivered great value for shareholders. It is run by a highly ethical management team. They are innovators in their industry. They’ve now run into some of the biggest problems they have ever experienced. A number of investments they made needed restructuring. They are potentially trying to get back some capital from some of the companies that are in trouble. Thinks they will get through those hurdles. The key question is, is there a fundamental shift in how they allocate capital and whether fundamental mistakes have been made, or whether it is just something that happened because of irregularities. He thinks it is just bad apples that has happened. Feels the dividend yield is sustainable.

6.9% dividend yield, and the payout is 75%, so the dividend is covered, but stretched. Earnings estimates are up 1% in the last 90 days. Earnings are expected to have a very modest growth of 3% for 2017 versus 2016. Free cash flow is a modest at 2.3%. This borders in the top 3^rd of his database. If looking for an income vehicle, he would look elsewhere.

(A Top Pick Feb 2/16. Up 3.97%.) This has been a phenomenal long-term performer. The market has become very quantitative and momentum driven. The stock is now stabilizing and it is a great buying opportunity.

(A Top Pick Jan 7/16. Up 7.59%.) Most of the return in the last year has been dividend return. The stock has basically gone nowhere. Because they invest in a number of different private companies through preferred share mechanisms, a number of those companies ran into problems over the last year. He’s been waiting for them to either restructure, exit or redesign, and come to some conclusion on some of their problems. He is finally seeing a few of them working out. Over the year, the company has been diversifying their holdings, and thinks they are in a good position to continue to make more investments. As they diversify they become less and less dependent on any one particular individual company. Wouldn’t be surprised to see this going back into the high $20 and beyond.

A very good management team, but not so certain he likes the structure. They go to businesses needing capital and will have a preferred equity dealt to them. They’ll get a distribution on that, which creates a yield for investors in this company. They’ve had 5 underlying businesses that have been a little challenging, which is putting pressure on the yield. Over the last 3-4 years, there have been a lot of Special Purpose Acquisition Companies coming into the market, who specifically raise money to buy private. There is more and more capital chasing less and less great companies. It is going to be harder and harder to find deals. He’d be happier buying at around BV of $18-$19.

This has been a great little company over the years, with a very good historical record of increasing the dividend. Last year they ran into some portfolio problems, pretty much for the 1^st time of anything significant. There are 4 or 5 companies that are under development and are not performing, and not paying royalty payments to them. Last week they made another announcement, and as they continue to make new investments, it dilutes that problem. But they still have the underlying problem of some underperforming investments. He would be a cautious buyer for income. They have to get good credit for 5-6 years of good growth and good performance. Dividend yield of 7% is not being covered by cash flow right now, but doesn’t think it is going to get cut either.

Royalty plays. Great dividend yields, but doesn’t see a lot of reason to get constructive on these names. Sees better opportunity on dividend growth elsewhere.

Consensus earnings estimate for 2017 is $1.68, which compares to 2016 estimates of $1.61. The 6.7% dividend yield is the big question. Can it be maintained? The payout on 4 quarters of trailing cash flow is 75%. His rule of thumb is, if it pays out more than 100%, it is not sustainable. Cash flow estimate is from $1.75 in 2016, growing to $2 in 2017, a 10% increase. There is a concern that rising interest rates will affect them, but in his view, they have a greater opportunity to end up increasing their business, compared to someone who has a stable portfolio of either apartments or commercial rental properties. There are other income opportunities he would prefer.

He likes it. They inject capital into companies via preferred shares. This year was tough because some of their partners ran into difficulties. The cash flow is sustainable. You get a 7% yield plus some growth.

Has a very small Short position, because their most recent quarter showed their growth had slowed down. He tends to invest in companies on the long side that have positive change, in short those that have negative change. Doesn’t think there is any problem with the dividend. A lot of their business is out west, and with oil prices increasing, this could see a bit of a rebound.

Had recommended this very early this year, and it ran into problems. It is an alternative finance company, primarily for private companies that have a long-term track record of being profitable, where management is looking for a way to finance without giving up control. The company primarily advances preferred stock, which participates with the growth of the company. When Alaris makes an investment, they are sort of looking towards earning a 15% rate of return, and has a policy of paying out a 6% dividend. Dividend yield of 6.84%. (Analysts’ price target is $24.46.)

(A Top Pick Dec 7/15. Up 6.72%.) Great long-term growth story, that went through a bit of a hiccup in the last year. Has been buying in the last month. This has been operating and growing continuously for 13 years. This may be the 1^st year that they end up with flat, too little bit down, earnings. Pays a 7%+ dividend, and trades at around 12X earnings, and at 1 or 2X Book. Good management.

Almost like a private lending business where they have different stakes in companies through loans or preferred share agreements. Some of those have been troubled recently which has caused the share price to come off. He is not fond of the business model and they have a reasonable amount of debt which he doesn’t like. Some of the underlying investments have not been doing all that well.