Diversified Royalty Corp. (TSE:DIV), which owns royalties in companies like Mr.Lube and Air Miles, has been in the news recently for a few reasons. Earlier today, it announced that it is raising about C$40 million through a common share offering (compared to the C$30 million originally announced yesterday). It’s raising these funds at a share price of C$2.80. As a result, the stock finished around that level today, falling by 7.79%. Additionally, yesterday, DIV increased its dividend by 2.1% to C$0.24 per share, effective at the start of 2023. This brings its forward dividend yield to about 8.5%, making the stock worth considering.
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On top of this, the company also announced that it’s acquiring the trademarks of Stratus Building Solutions. Stratus is now DIV’s seventh company in its royalty portfolio, and it is expected to make up for 14% of its pro-forma adjusted revenue.
Lastly, Diversified Royalty announced its Q3-2022 results last week, which saw the company produce record adjusted revenues while increasing its distributable cash from C$0.0601 per share to $0.0639 per share. For the nine months ended September 30, Mr.Lube accounted for 47.5% of the company’s revenues. Therefore, the Stratus acquisition should be a net positive, as it will diversify the company. Stratus is a good fit for DIV, according to the company, since it has historically steady and predictable cash flows with solid growth potential.
Is Diversified Royalty’s Dividend Worth It?
With an 8.5% dividend yield at DIV’s current price, you’d think the stock’s ticker stands for “dividend.” DIV’s dividend may be worth it for income-oriented investors that are looking for high yields but don’t care for high growth.
According to DIV’s earnings report, its payout ratio for Q3 was 86.1%, and its nine-month payout ratio was 88.7%. This means that most of its earnings are being paid out as dividends. However, it still gives a little bit of wiggle room for safety in case earnings drop in the future (or for future dividend increases).
It remains to be seen how its payout ratio will be affected by the Stratus acquisition and the equity raise (as more shares outstanding mean that more dividends have to be paid), but we imagine that the dividend will still be covered. After all, Diversified Royalty likely wouldn’t announce a dividend increase if it didn’t believe it could pay it.
Still, there may not be too much growth ahead for its dividend. In fact, DIV’s dividend isn’t much higher right now than where it was in 2017 at C$0.2225 per share. The company’s dividend growth is expected to be about 3.2% per year for the next three years.
Additionally, on a revenue-per-share basis, it’s a low-growth company. Its revenue-per-share was C$0.27 in 2016 and is C$0.35 now for the trailing 12 months. Still, its dividend is covered, for now, making it relatively safe.
Is DIV Stock a Good Buy, According to Analysts?
Only two analysts are covering DIV stock currently. One has a Buy rating, and one has a Hold rating. Nonetheless, this makes for a “Moderate Buy.” The average DIV stock price target of C$3.38 implies about 19% upside potential.
Conclusion: A Solid Income Play
Diversified Royalty Corp. has a solid, profitable business model. The last time DIV reported a loss on a cash-flow basis for the year was in 2014. Along with its 86.1% payout ratio and high dividend, it’s worth considering. Still, investors should monitor how the Stratus acquisition affects the company’s future results.
