On today's TSX Breakouts report, there are 61 stocks on the positive breakouts list (stocks with positive price momentum) and 10 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list. The share price recently experienced a 'golden cross' – a bullish technical formation. The stock has an unanimous buy recommendation from the seven analysts who cover the stock. The share price has rallied over 24 per cent year-to-date. In addition to price appreciation, the stock offers investor an attractive dividend yield of approximately 7 per cent. The security featured today is Diversified Royalty Corp. (DIV-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Diversified Royalty is a corporation with three royalty streams from Sutton, Mr. Lube, and now AIR MILES trademarks in Canada. Sutton is a residential real estate brokerage operator with over 200 offices across Canada. Mr. Lube is an auto service provider with 170 stores across the country. After the market closed on August 25, management announced a key milestone for the company - the addition of a third royalty. DIV will start receiving a quarterly royalty amounting to 1 per cent of gross billings from the Canadian AIR MILES program. The deal is subject to the Bank of Montreal's AIR MILES contract being renewed or replaced with an AIR MILES contract with another one of the four other major Canadian banks. The BMO contract expires in early 2018.
Also positive, in the news release, the president and chief executive officer Sean Morrison alluded to a potential fourth royalty acquisition by year-end stating, "DIV's objective is to use its remaining $33 million of cash on hand combined with debt financing to fund its next trademark and royalty acquisition from a high-quality business by the end of 2017."
Dividend policy
The company pays its shareholders a monthly dividend of 1.854 cents per share, or 22.248 cents per share on a yearly basis. This translates to an annualized yield of just under 7 per cent. The company has maintained its dividend at this level since 2015. With the AIR MILES royalty stream, the payout ratio will improve to 107 per cent.
Management is firmly committed to its dividend. On the conference call held on August 25, the CEO stated, "The current position of the Board of Directors is we plan to maintain DIV's annual dividend at $0.2225 per share, and obviously, our job is to deploy the capital we have remaining on our balance sheet to grow our distributable cash per share."
Analysts' recommendations
This small cap stock, with a market capitalization of $338-million, is covered by seven analysts on the Street, of which all seven analysts have buy recommendations.
The seven firms providing research coverage on the company are as follows in alphabetical order: Beacon Securities, Cormark Securities, CIBC World Markets, GMP, Haywood Securities, Paradigm Capital, and PI Financial Corp.
Financial forecasts
The Street is forecasting EBITDA of $18-million in 2017, rising to $29-million in 2018. The consensus earnings per share estimates are 13 cents for 2017, incresing to 19 cents in 2018.
Earnings forecasts have increased for 2018 with the announcement of a third royalty stream. For instance, three months ago, the consensus EBITDA estimates were $18-million for 2017 and $25-million for 2018. The consensus earnings per share estimates were 13 cents in 2017 and 17 cents in 2018.
Valuation
The stock can be valued using a dividend discount model method, forecasting future dividends and discounting them back to the present value.
The one-year consensus target price is $3.47, suggesting there is 8 per cent upside in the share price over the next 12 months. When combined with the yield, this equates to a potential total return of over 15 per cent. Target prices range from a low of $3.00 from the analyst at CIBC World Markets (implying the stock is fully valued) to a high of $3.75 from the analysts at Cormark Securities and Haywood Securities (suggesting 17 per cent upside potential in the share price). Individual target prices are as follows in numerical order: $3.00, $3.25, $3.40, two at $3.70, and two at $3.75.
Revised recommendations
In August, three analysts covering the company revised their target prices – all higher.
Gavin Fairweather from Cormark Securities increased his target price to $3.75 from $3.25 as did Colin Healey from Haywood Securities. Corey Hammill from Paradigm Capital lifted his target price to $3.40 from $3.
Insider transactions
Only one insider has reported any trading activity in the public markets so far this year, and the trade occurred back in March.
On March 31, Murray Coleman, who sits on the board of directors, purchased 12,000 shares at an average price per share of approximately $2.56, initiating a portfolio position.
Chart watch
The share price has experienced a parabolic move higher, rising 38 per cent since the AIR MILES announcement. Year-to-date, the share price has rallied 24.5 per cent.
In recent days, the share price formed a 'golden cross' – a bullish technical formation that occurs when the 50-day moving average crosses above the 200-day moving average. The share price continues to climb higher, and jumped nearly 2 per cent on Monday on high volume. Over 1.4-million shares traded, above the historical three-month daily average trading volume of roughly 1-million shares.
In terms of key resistance and support levels, the stock price has initial overhead resistance around $3.40 (near its closing high set back in April 2010). Looking at the downside, there is initial support around $3.00.
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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, financial forecasts, and provides a brief technical analysis for a security 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 security 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.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indices that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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