Given the high volatility equity markets, capital preservation is a key priority to many investors. High-dividend-paying securities can be attractive near-term as well as longer-term investments.
Given the low interest rate environment, dividend stocks remain in high demand from investors, especially with the aging baby boomer population. Fed fund futures are now pricing in a 0 per cent probability of a rate hike in July, September and November, and only a 7.5 per cent probability of an increase in rates by the U.S. Federal Reserve in December. Interest rates are likely staying lower for longer, given worrisome global economic conditions.
One dividend stock that investors may want to put on their radar screens is Chorus Aviation Inc. The stock's valuation is attractive at a share price below $6, and given the market volatility, investors may get an opportunity to accumulate shares in the mid to high $5 range.
The investment thesis is discussed below.
The company
Halifax-based Chorus Aviation is a holding company that owns Jazz Aviation LP. Jazz is the largest regional airline in the country, providing services for Air Canada to smaller communities.
- Upcoming potential catalyst. Management sees the regional aircraft leasing market as a compelling growth opportunity for the company, and within the next few months, management expects to announce its business strategy in the leasing space. Potential growth in this segment, through third-party regional airline leasing contracts, may result in higher margins, rising earnings forecasts and expanding multiples. In other words, analysts’ target prices may have room to expand.
- Earnings stability with the amended CPA contract. Last year, management announced an amended Capacity Purchase Agreement (CPA) with Air Canada, which remains in effect until 2025. Under the new CPA, Chorus 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. In addition, fuel price increases are passed through to Air Canada.
- Solid balance sheet to support its growth. In April 2016, Chorus announced the purchase of five regional jets, expected to be in service by the end of the second quarter in 2017. Last year, the company acquired Voyageur Airways, which was immediately accretive to Chorus’ earnings and free cash flow, and provides the company with a foundation for future revenue growth and diversification.
- Solid cash flow supporting the attractive dividend. Chorus Aviation pays shareholders a monthly dividend of 4 cents per share, or 48 cents per year, equating to an annualized dividend yield of approximately 8 per cent. Management has maintained the dividend at this level since early 2015. The new CPA provides cash-flow stability, suggesting the dividend should be sustainable.
Valuation
The stock trades at a price-to-earnings multiple of approximately 6.7 times the 2017 consensus estimate, relatively in line with its five-year average. Over the past five years, the stock has traded largely between 5.5 times and eight times forward earnings.
Analysts' recommendations
This small cap stock, with a market capitalization of over $700-million, is well covered by the Street. According to Bloomberg, the average one-year price target at $7.06, which is based on five buy recommendations and three hold recommendations. This implies the share price may appreciate by approximately 18 per cent over the next 12 months. Individual price targets are as follows: $6, two at $6.50, two at $7, two at $7.50, and $8.50.
The consensus EBITDA forecast is $237-million in 2016, rising more than 6 per cent to $253-million in 2017. The Street's earnings per share forecast is 92 cents in 2016, and 90 cents in 2017. (EBITDA represents earnings before interest, taxes, depreciation and amortization.)
Chart watch
The stock price formed a "double top" pattern, peaking around $6.70 in mid-2015 and returning to this level in March, 2016.
Year-to-date, the stock price is relatively unchanged. However, the share price is in a downtrend with initial technical support between $5.75 and $5.85, near the stock's 200-day moving average, which lies at $5.86. There is very strong support just above $5.
The bottom line
There is long-term value in companies with relative earnings stability and dividend income. Weakness in this stock is a buying opportunity, particularly if the stock price falls to the mid to high $5 level.
Looking at the downside risk, should the stock's multiple compress to six times, this would equate to a share price of just under $5.50. If the stock's multiple contracts to 5.5 times, this would equate to a share price of approximately $5, a scenario that I believe is remote, and if it did occur would be short-lived, given the dividend yield would spike to just under 10 per cent.
I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action
The author does not personally own units in the security mentioned in this story.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market.