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.
About 91% of Alaris’ investment is in U.S. based companies and the balance is in Canadian companies. Alaris focuses on business, professional, information and healthcare services, distribution and logistics, industrials and consumer products industries. By industry, 58% of its investments are in business services, 35% in industrials, and 7% in consumer products and 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.Investment Data
- Opportunity Score: 43
- Ticker: TSE:AD
- Sector: Financial Services
- Industry: Credit Services
- Market Cap: 0.29B
- P/E: 7.87
- Dividend Yield: 21.18
- Dividend Payout Ratio: 168.37
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
Revenue Growth & Market Exposure
Alaris earns its revenues by 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. The corporation has an impeccable history of partnering with 29 private companies since its inception. Out of the thirteen partnerships, that Alaris exited, ten yielded a total return of over 70%.
Alaris continues 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. Alaris had invested $185 million into four new partners in 2018, which was a record by itself.
Alaris targets well-run, successful businesses for providing capital, in return for monthly preferred equity distributions. 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. The private company partners also prefer Alaris for its low-cost equity. Alaris also exercises certain restrictive covenants in order to protect the ongoing payment of the distributions.
Alaris has a strong 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 16 partners are key competitive advantages for the company. Alaris is aiming to generate organic growth of 3-5% per year and 2019 distributions from companies to be over $110 million.
Alaris is a Canadian Dividend Aristocrat and has paid over 127 consecutive monthly dividends totalling more than $390 million. Alaris paid $1.622 per share as dividend during the year 2018, with an actual payout ratio of 75.8% for the year. However, the company is aiming to reduce its payout ratio in the future. It has an attractive dividend yield of almost 9%. The company has grown its dividend at an average of 7% over the last five years. It last raised its dividend by 1.8% and presently pays a monthly dividend of $0.1375 per share raising it from the previous payout of $0.135 per share.
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 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 company makes sure that there is no loss of recurring payments as a result of its strategy of carefully screening its partners for quality.
Diversified businesses (unlike just medical services earlier) will also help in balancing the cash flow. Alaris’ earnings have compounded at more than 8% per annum over the last five years. 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.
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. There will be no dearth of quality companies looking for funds in North America, and given Alaris’ solid reputation and sound past track record, it should continue to enjoy ongoing top-line growth. The company’s efforts to grow and diversify its revenue stream should go a long way in supporting its dividend payments.
Unfortunately, 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.
DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.