Chorus Aviation (Chorus Aviation Stock Quote, Chart TSX:CHR) has been high flyer so far in 2019, as the stock is now up 33 per cent for the year. But with a history of cutting back its dividend, should investors be worried? Not really, says Lyle Stein of Vestcap Investment, who argues that the long-term deal just signed with Air Canada makes for clear skies for Chorus.
In January, regional aircraft leasing company Chorus Aviation firmed up its purchasing agreement with Air Canada, extending the agreement by another ten years, which must come as a sigh of relief to Chorus management. Chorus’ Jazz Aviation provides regional service to Air Canada, but the latter has made moves over the past year to expand its discount airline Rouge, potentially creating competition on Jazz’s established routes.
The new agreement clarifies the issue, said Chorus CEO Joe Randell in a conference call with investors. “There has been some concern about where does Jazz sit in Air Canada’s plans and how long is this relationship going to last,” said Randall. “This really puts those concerns to bed.”
Chorus’s stock is also looking attractive due to its handsome dividend, currently yielding 6.4 per cent. But the company has a history of dividend cuts, doing so three times over the past decade, most notably in 2013 when the dividend was chopped in half amid Chorus’ squabble with Air Canada over its previous purchasing agreement.
How safe is CHR’s dividend, then?
Stein says that the new deal — which adds a further $940 million in aircraft leasing income over the next 17 years but comes with lowered fixed fees for Chorus over 2019 and 2002 — should take away the bulk of those worries.
“They have a long-term arrangement now with Air Canada [but] it’s going to cost them,” says Stein, senior portfolio manager and managing director at Vestcap Investment, speaking to BNN Bloomberg last Friday. “Earnings have roughly been $0.80 to $0.85 for the last couple of years. They’re going to be down this year because they sacrificed a little current income for that long-term, almost take-or-pay type arrangement. That makes that dividend payout of $0.48, in our view, safe and payable.”
“It’s a name that we own and like,” he says. “When you think about the market return over the next ten years, six per cent looks awfully good, and in Canada, this is a pretty good way to get it.”