Updated on February 24th, 2020 by Bob Ciura
Monthly dividend stocks are unique in their ability to generate consistent dividend income for their shareholders. There are not many monthly dividend stocks. But they could be appealing for certain income investors, such as retirees, who desire more frequent payments than the traditional quarterly dividend payers.
With this in mind, we created a downloadable spreadsheet of all monthly dividend stocks in our coverage universe. You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter like dividend yields and payout ratios) by clicking on the link below:
Every year, we individually review all the monthly dividend stocks we cover. Chorus Aviation (CHRRF) is first up in the 2020 Monthly Dividend Stock In Focus series.
Chorus Aviation also stands out because of its high dividend yield. Chorus Aviation is trading at a yield of 6.1%. The company’s yield is more than three times that of the average yield of the S&P 500.
You can see a comprehensive list of all high dividend stocks with 5%+ yields here.
Because of its high dividend yield and monthly dividend payments, Chorus Aviation might seem like an attractive investment. This article will delve more deeply into the company’s business model and recent financial performance to see if that is true.
Business Overview
Chorus Aviation Inc is a relatively small Canadian aviation company, providing a range of aviation services including: contract flying, aircraft leasing, and maintenance, repair, and overhaul services. Through a long-term contract, Chorus Aviation provides substantially all of the flight operations for Air Canada Express.
This part of the business provides 92% of revenues and 70% of EBITDA. The contract extends through 2035. The company also provides regional aircraft leasing to 14 other airlines, through a fleet of 56 planes. Chorus Aviation had 2019 revenues of $1.0 billion and has a current market cap of $929 million.
It should be noted that Chorus Aviation is an international stock that trades on the Toronto Stock Exchange under the ticker CHR. Its U.S.-traded shares have the ticker symbol CHRRF. The stock has a market capitalization of approximately $920 million.
It should also be noted that U.S. investors face a 15% withholding tax on dividends paid by Canadian companies. This withholding tax is waived if shares of Canadian companies are held in approved retirement accounts, such as an IRA.
Growth Prospects
Investors can often gather a sense of a company’s ability to grow organically by considering its historical performance. All else being equal, companies with long track records of growth are more likely to continue growing looking forward.
Chorus Aviation’s historical performance leaves much to be desired. Performance improved in 2018, as Chorus Aviation had a 7.3% increase in revenue from 2017. Adjusted net income improved 5.5% for the year. But the company’s performance deteriorated in 2019.
Adjusted net income declined by 34% in the 2019 fourth quarter, and 21% for the full year. Declines were due to amendments to the Capacity Purchase Agreement, offset by growth in the Regional Aircraft Leasing segment.
Looking ahead, Chorus Aviation is expecting to drive growth by expanding its existing contracted flying operations to new customers and new geographies. In the fourth quarter, the company increased its committed leased fleet to 64 aircraft, an increase of 60% year-over-year. It also added Croatia Airlines as a new airline customer to its leasing portfolio.
While we like that the company is increasing the size of its fleet, we find that Chorus Aviation’s track record gives investors little confidence that this new growth plan will lead to superior investor returns over the long run.
Competitive Advantages & Recession Performance
Chorus Aviation operates in the airline industry, a sector of the stock market that is notorious for its inability to endure through economic downturns.
Some research reveals that Chorus Aviation is no different. This can be seen from the company’s earnings-per-share history before, during and after the last recession.
- 2007 earnings-per-share of $0.92
- 2008 earnings-per-share of $0.82 (11% decline)
- 2009 earnings-per-share of $0.56 (32% decline)
- 2010 earnings-per-share of $0.71 (27% increase)
- 2011 earnings-per-share of $0.40 (44% decline)
- 2012 earnings-per-share of $0.58 (45% increase)
The company has experienced wild swings in profitability during this time period. Investors looking for stable earnings-per-share growth are likely to be disappointed with Chorus Aviation.
The company’s dividend history is also very choppy. Since Chorus Aviation’s initial public offering in 2006, it has reduced its dividend three times. While there are certainly companies that can recover from the ill effects of a dividend cut, we prefer to invest in businesses with long histories of steadily rising dividends (such as the Dividend Aristocrats).
Chorus Aviation’s track record of dividend cuts means that we hesitate to recommend this stock for income investors. On the positive side, the company has reasonable leverage, and management sees growth opportunities in the aircraft leasing segment of the business.
Furthermore, they have a long-term relationship with Air Canada, and a newly negotiated contract going through 2035. The structure of the contract provides some stability to their revenue stream. In all, we expect underlying growth of 5% per year for Chorus Aviation over the next five years.
Valuation & Expected Returns
We value Chorus Aviation stock on the basis of cash flow per share, due to the company’s highly inconsistent earnings over the past 10 years. Using the current share price of US$5.85, the stock is trading with a price to cash flow per share ratio of 3.7 at the moment.
Chorus Aviation’s current price-to-earnings ratio is slightly below its long term average. In addition, the company is trading at a price-to-earnings ratio that is above many of the larger, more stable airlines, despite Chorus being a significantly smaller and riskier stock.
We assign a 2025 P/CFPS ratio target of 5 for Chorus Aviation. This is more in line with the valuation of peers. Given the nature of underlying volatility, we feel that investors should continue to expect volatile growth in the stock valuation.
That said, expansion of the valuation multiple to our fair value estimate would lift annual returns by 6.2% over the next five years. In addition, the stock has a high dividend yield of 6.4% right now. The company pays a monthly dividend rate of $0.04 in Canadian dollars. On an annual basis, dividends (in U.S. dollars) equal approximately $0.36 per share. Including valuation expansion, dividends, plus 5% annual cash flow per share growth over the next five years, 0verall total annual returns could reach 17.6% through 2025 .
This is a high expected rate of return, which warrants a buy recommendation. Investors should note that Chorus Aviation’s track record suggests that it is far from a high-quality business. Sometimes, investing in businesses of questionable quality can still result in excellent investor returns if the businesses are purchased at a valuation indicative of their growth prospects.
Final Thoughts
Chorus Aviation has two characteristics that immediately stand out to dividend growth investors:
- Monthly dividend payments
- Attractive dividend yield of 6.4%
These two factors are both working in favor of the stock. But this also looks to be among the riskier high-yield dividend stocks investors could buy. The company also has exhibited significant earnings volatility that make the stock less appealing for risk-averse income investors.
Chorus Aviation has implemented multiple dividend cuts in recent years and the company has failed to grow revenue and net income over the long run. But for investors willing to take the risk associated with this specific business, Chorus Aviation could generate high returns over the next five years.
