Alaris Equity Partners Income Trust (TSX:AD.UN) is one such TSX dividend stock you should be holding in a TFSA right now. Alaris Equity is valued at a market capitalization of $876 million and provides alternative financing to private, primarily family-owned businesses, in exchange for royalties or distributions in lieu of equity ownership.
The company invests between $30 million and $150 million in mid-market companies in North America that generate annual EBITDA (earnings before interest, taxes, depreciation and amortization) between $5 million and $50 million.
Alaris focuses on stable sectors such as business services, healthcare, distribution and industrials, while avoiding risky sectors such as oil and gas, technology and startups.
Corporate structures aim to generate predictable cash flows for dividend payments to shareholders, while allowing business owners to maintain control and avoid excessive debt.
Alaris is expected to pay shareholders an annual dividend per share of $1.38 per share in 2025, translating into a forward yield of 7.2%.
Is this TSX dividend stock a good buy?
Alaris Equity Partners achieved a record third quarter, with net book value per unit rising 6% to $25.10. This metric was the highest in the company’s 21-year history, as strong fair value gains and solid recurring distributions underscored the resilience of its alternative financing model.
The private equity firm generated earnings and total income of $1.90 per unit, another company record, driven by $47.9 million in net unrealized fair value gains across nine portfolio investments that reflected underlying earnings growth and value creation within its partner base.
Total sales and operating income increased 7.8% year-over-year to $58.1 million, supported by new investments. It includes an investment in McCoy, a Nebraska-based roofing company that operates in the lucrative hail belt, where roofs last about seven years compared to the 20-year national average.
Preferred distributions increased 7.3% to $40.7 million in the quarter, maintaining a strong annual return on preferred capital of approximately 12%. However, overall distributions were lower than the previous year, particularly from the fleet partner, where the board diverted cash flow to growth initiatives rather than distributions, despite strong operating performance.
Management announced a dividend increase, marking the first boost in years as the company looks to restore its historic trading premium above book value. The 48% payout ratio for the quarter remained well below the targeted range of 65% to 70%, providing significant flexibility for reinvestment. At the same time, Alaris is preparing for planned portfolio exits over the next 12 to 24 months, which are expected to deliver significant returns and fund continued implementation.
Alaris ended the third quarter with $160 million in total liquidity and a weighted average earnings coverage of 1.5 times across partners. It is striking that 13 of the 21 portfolio companies have no debt, or less than one-off debt compared to EBITDA.
Is TSX stock undervalued?
Analysts who follow Alaris stock predict that free cash flow will rise from $59.4 million in 2024 to $95.4 million in 2026. Given an annual dividend burden of $62 million, the payout ratio is quite sustainable at less than 70%.
Given consensus price targets, TSS shares are trading at a 33% discount in November 2025. If we adjust for dividends, the cumulative return could be closer to 40%.
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