Chorus Aviation stands out because of its remarkably high dividend yield.

Chorus Aviation was trading yesterday at a yield of 5.5%. This makes the security one of the few publicly-traded issues with a yield above 5%.

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. Some due diligence reveals that this isn’t necessarily the case.

This article will analyze the investment prospects of Chorus Aviation in detail to determine whether or not the security merits investment for dividend growth investors.

Business Overview

Chorus Aviation is an airline holding company based in Canada whose main asset is the ownership of the Jazz Aviation airline. The company has a market capitalization of $1.1 billion and is headquartered in Halifax, Nova Scotia, Canada. Chorus Aviation completed its initial public offering in 2006.

Even for Canadians, Jazz Aviation is not a well-known name. That’s because Jazz Aviation is primarily a contractor of airline services to other airlines, primarily Air Canada under the brand name Air Canada Express.

Source: Chorus Aviation October 2017 Investor Presentation, slide 3

More specifically, Chorus Aviation has three primarily business lines:

• Contracted flying operations: Chorus Aviation leases its fleet to other, more well-known operators such as Air Canada. The customers (i.e. Air Canada) determines the destinations and fleet schedule under these arrangements.
• Maintenance, repair, and overhaul: As its name suggests, this segment repairs and maintains the airline fleets of other operators. Chorus Aviation has significant intergovernmental customers in this segment which includes the United Nations and NATO.
• Regional aircraft leasing: This segment is the company’s newest, and was established in early 2017 with the goal of expanding the company’s expertise in contracted flying operations to a more global base of customers.

Additional details about the operating segments of Chorus Aviation can be seen below, including the operating subsidiaries that compose each segment.

Source: Chorus Aviation October 2017 Investor Presentation, slide 4

It should be noted that Chorus Aviation is an international stock that trades on the Toronto Stock Exchange under the ticker CHR. Accordingly, United States investors that are exclusively seeking domestic equity exposure should look elsewhere.

Growth Prospects

Investors can often gether 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.

With this in mind, Chorus Aviation’s historical performance leaves much to be desired. Aside from a one-time jump in revenue between fiscal 2007 and fiscal 2008, the company’s revenue has not shown any meaningful trend up and to the right.

Source: YCharts

Stagnating revenue is never welcome, but sometimes it can be offset by cost-cutting. After all, stable revenues and declining expenses will lead to higher net income.

In Chorus Aviation’s case, this has not occurred. The company’s net income has shown a very similar trend to its revenue – no meaningful increase since the company’s 2006 initial public offering.

Source: YCharts

To make matters worse, Chorus Aviation’s explosion in revenue between fiscal 2007 and fiscal 2008 is primarily due to a substantial secondary share offering, which quadrupled the number of shares outstanding from ~25 million to ~100 million. The dilution effect of this share offering can be seen below.

Source: YCharts

Looking ahead, Chorus Aviation is expecting to drive growth by expanding its existing contracted flying operations to new customers and new geographies. The company’s track record gives investors little confidence that this new growth plan will lead to superior investor returns over the long run.

Competitive Advantage & 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 by looking at the company’s dividend history. Since Chorus Aviation’s initial public offering in 2006, it has cut its dividend not once, not twice, but three times.

Chorus Aviation’s long-term dividend history can be seen below.

Source: YCharts

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 or the Dividend Achievers). Chorus Aviation’s track record of dividend cuts means that we hesitate to recommend this stock in good conscience to our readers.

Valuation & Expected Total Returns

Chorus Aviation reported earnings-per-share of C$0.91 in fiscal 2016, and the company is currently trading at a stock price of C$8.66 for a price-to-earnings ratio of 9.5x.

The following diagram compares the security’s current price-to-earnings ratio to its long-term historical average.

Source: YCharts

Note: The last data point in the above chart does not line up with the horizontal line for Chorus Aviation’s current price-to-earnings ratio. This is because the historical time series of data is referring to Forward P/E while the ‘current P/E Ratio’ series is using 2016’s actual earnings (instead of 2017 earnings estimates).

As the above image shows, Chorus Aviation’s current price-to-earnings ratio is more than 20% above where it was a year ago today. In addition, the company is trading at a price-to-earnings ratio that is very similar to many of the larger, more stable airlines (like American Airlines (AAL), Delta Air Lines (DAL), and United Continental Holdings (UAL)) despite Chorus being a significantly smaller and riskier investment.

As we’ve seen, 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. This is a strategy that Warren Buffett calls ‘cigar butt investing’ because you’re picking up a discarded cigarette (a declining company) for one last puff (some investor profits).

In this case, Chorus Aviation’s valuation (which is relatively in-line with many larger peers) and its business quality (subpar at best) do not really allow for a cigar butt investment strategy to be interested. On a more general note, we believe that investing in businesses of the highest quality when purchased at fair or better prices is a better strategy for the majority of investors.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett

With this in mind, we recommend avoiding Chorus Aviation unless its valuation or business quality change significantly.

Final Thoughts

Chorus Aviation has two characteristics that immediately stand out to dividend growth investors:

• Monthly dividend payments
• Attractive dividend yield of 5.5%

The company also has some historical traits that are far less appealing. Chorus Aviation has implemented multiple dividend cuts in recent years and the company has failed to show any ability to grow revenues and net income over the long run.

Accordingly, we recommend avoiding this stock and sticking to larger, blue-chip companies in the airline space (if sector exposure if your primary goal).