Wednesday’s TSX breakouts: This juicy dividend should be sustainable for a decade

The S&P/TSX composite index continues to follow the price of oil, which is lower today and being driven by two key news items. On Tuesday, the weekly U.S. American Petroleum Institute report indicated that crude oil inventories rose 7.1 million barrels, higher than expectations, highlighting a continued oversupplied market. As well, Saudi's oil minister, Ali Al-Naimi, indicated that a production cut is not going to occur. The price of West Texas intermediate is down approximately 3 per cent, falling below $31 (U.S.). As a result, North American equity markets are expected to come under pressure in today's trading. At 10:30 a.m. (ET), weekly oil inventory data from the U.S. Energy Information Administration will be released and may cause further volatility in the price of oil. Given the high market volatility, defensive stocks continue to remain in favour.

In terms of technical breakouts, there are 26 stocks on the positive price breakouts list. Stocks with positive price momentum remain defensive securities, such as gold stocks, real estate investment trusts, grocery store companies, and stocks with high dividend yields.

Discussed below is a high-dividend paying stock, Chorus Aviation (CHR.B-T). A brief outline is provided that may serve as a springboard for further fundamental research.

Chorus Aviation owns Jazz Aviation, Air Canada's regional airline that provides services to many smaller communities. One year ago, management announced it reached a positive Capacity Purchase Agreement (CPA) with Air Canada, which remains in effect until 2025. Under the new CPA, Chorus now has a fixed fee arrangement with Air Canada, meaning that Chorus receives a fixed fee per aircraft regardless of how often the plane is flown. Also positive is that Chorus will realize significant labour cost savings. In addition, Chorus is not exposed to the risk of rising fuel prices in the future as price increases are passed through to Air Canada.

On Feb. 19, the company reported better-than-expected fourth-quarter results. Earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at $64 million, above the consensus estimate of $55 million, lifting the stock price up 1.4 per cent that day.

The company has a strong balance sheet to support future acquisition growth to diversify its business. In May 2015, the company acquired Voyageur Airways for $80 million, reflecting a multiple of 4.7 times 2014's adjusted EBITDA. The acquisition was immediately accretive to Chorus' earnings and free cash flow. Management continues to evaluate other potential strategic acquisition opportunities.

Dividend Policy

Chorus Aviaton pays shareholders a monthly dividend of 4 cents per share, or 48 cents per year, equating to an annualized dividend yield of 8.1 per cent.

The new CPA provides cash flow stability, suggesting the attractive dividend should be sustainable. On the fourth-quarter conference call, Joseph Randell, the Chief Executive Officer stated, "The cash flows derived from this agreement are anticipated to support the dividends for the term of the CPA to 2025 and provides stability to grow and diversify Chorus."

Valuation

The stock trades at a price-to-earnings multiple of 6.5 times the 2016 consensus estimate, slightly above the three-year average of 6.2 times. Over the past three years, the stock has traded predominately in a range between 5.5 times and 8 times forward earnings.

Analysts' Recommendations

According to Bloomberg, there are five analysts with a buy recommendation, and two analysts with hold recommendations with the average one-year price target at $6.96, implying the shares may appreciate in value by 18 per cent over the next year. Price targets range from a low of $6 to a high of $8.50. Individual price targets are as follows: $6, $6.25, $6.50, two at $7, $7.50, and $8.50.

The consensus EBITDA forecast is $242 million in 2016, rising slightly to $252 million in 2017.

Chart Watch

Year-to-date, the stock price is up nearly 3 per cent.

During the market volatility over recent months, the stock price held above $5, a key support level, and in recent days, has rallied above both its 50-day and 200-day moving averages.

The next overhead resistance level is at $6, and then at $6.73, its high from June 2015. There is downside support around $5.50, close to its 50-day moving average, and failing that at $5.

The relative strength index is at 74, in overbought territory. Generally, a reading at or above 70 indicates an overbought condition. That being said, a stock can remain overbought for some time.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, and provides a brief technical analysis for a stock to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a stock appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Below is a list of stocks in the S&P/TSX composite index and the S&P/TSX Small Cap index that are technically breaking out, reaching new 55-day highs or lows. Stocks on the positive breakouts list have displayed positive price momentum during this period. Stocks on negative breakouts list have experienced negative price momentum.