Wednesday's TSX breakouts: This stock has a 8.9% yield and 6 unanimous ‘buy’ calls

On Tuesday, the S&P/TSX composite index gained 156 points, or 1.07 per cent to close at 14,752. There were 205 securities in the TSX Index that advanced, 39 securities declined in value, and three stocks closed the day unchanged. Every single sector in the Index, except for one (the consumer discretionary sector), closed in positive territory, led by strength in gold stocks.

The S&P/TSX composite index is up 0.18 per cent month to date, and up 13.39 per cent year to date.

On today's TSX Breakouts report, there are 43 securities on the positive breakouts list (stocks with positive price momentum) compared to just 10 stocks on the negative breakouts list (stocks with negative price momentum).

Discussed today is a small-cap, consumer discretionary stock from the positive breakouts list. It offers shareholders an attractive dividend yield of 8.9 per cent with the Street forecasting the share price may rally 34 per cent over the next 12 months. The stock I am referring to 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 multi-royalty corporation with three royalty streams from Franworks, Sutton, and Mr. Lube. Franworks operates pub restaurants under the banners Original Joe's, State & Main, and Elephant & Castle. Sutton is a residential real estate brokerage operator with approximately 200 offices across Canada. Lastly, Mr. Lube is an auto service provider with roughly 169 stores across the country.

Last month, management announced the sale of its Franworks rights to Cara Operations Ltd. (CAO-T) for $90-million, with the sale expected to be completed in two to three months. Once completed, this will reduce the company's royalty partners down to two, Sutton and Mr. Lube. In a news release, Sean Morrison, the president and chief executive officer stated, "Diversified felt that Franworks' large Alberta-based restaurant exposure has put pressure on Franworks under its royalty structure which could have a negative long term impact on Diversified. The sale of the FW Rights will reduce Diversified's exposure to Alberta from 30.1 per cent to 16.7 per cent...With over $80 million of cash on its balance sheet and two strong royalty partners, pro-forma for the sale of the Franworks' Rights, Diversified will have the opportunity as well as funds to acquire additional royalty streams from growing, multi-location businesses and franchisors."

A key corporate objective by management is to diversify and grow its royalty stream by making accretive purchases across a variety of industries.

After the market closed on Aug. 15, the company reported second-quarter financial results that were relatively in-line with expectations. Revenue came in at $7.5-million, in line with the consensus estimate. Normalized earnings before interest, taxes, depreciation and amortization (EBITDA) was $7-million, above the Street's expectations of $6.8-million. The share price closed unchanged the following trading day.

The company will be reporting its third-quarter financial results on Nov. 14.

Dividend policy

Management is committed to returning capital to shareholders. In 2015, management announced two dividend increases, in August and in October.

The company pays shareholders a dividend of 1.854 cents per share, or 22.248 cents per share on a yearly basis. This translates to an annualized dividend yield of 8.9 per cent.

Management intends to increase its dividend as its cash flow per share increases.

Valuation

According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of over 14 times the 2017 consensus estimate and at a price-to-earnings multiple of 14.7 times the 2017 consensus estimate. The valuation is high due to the company's sale of its Franworks rights, significantly reducing the Street's 2017 EBITDA and EPS forecasts.

Analysts' recommendations

This small cap stock, with a market capitalization of $285-million, has six analysts that have issued research reports on the company since the start of the year – all six analysts have 'buy' recommendations. Firms providing analyst coverage are: Beacon Securities, Cormark Securities, GMP, Haywood Securities, Paradigm Capital, and PI Financial Corp.

Target prices range from a low of $2.75 to a high of $3.75. The average one-year target price is $3.36, which implies there is 34 per cent upside potential in the share price over the next 12 months. Target prices in numerical order are as follows: $2.75, $3, $3.25, two at $3.70, and $3.75.

The Street is forecasting revenue of $29-million in 2016, declining to $23.6-million in 2017 given the sale of the Fransworks rights.

Chart watch

The share price has made a recovery in 2016 with the legal overhang relating to John Bennett, the former chief executive officer of the company until 2004, removed. Year-to-date, the stock price is up 3 per cent.

There is overhead resistance between $2.50 and $2.60, and after that between $3 and $3.10.

In terms of downside support, there is support at its 50-day moving average (at $2.37), and failing that at its 200-day moving average (at $2.26).

This small cap stock is liquid. The two-month historical average daily trading volume is just over 1.1-million shares.

---

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, 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 indexes 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.