Introduction

CareRx Corporation (TSX:CRRX) is a provider of pharmacy services to seniors and other congregate care communities in Canada. Its second-quarter results showed higher revenue, steady adjusted EBITDA and a recently increased dividend.

The company reported a Dividend yield of 2.47% on a Trailing Twelve Months basis. The company declared a quarterly dividend of CAD 0.022 per share, described as a 10% increase, which equals CAD 0.088 a year if the rate is held, by my own arithmetic.

Pharmacy service companies are judged on adjusted EBITDA, on operating cash flow, and on leverage.

Dividend Sustainability Analysis

Revenue rose and profit was thin. Revenue was CAD 93.6 million, up from CAD 91.4 million, and adjusted EBITDA was CAD 8.0 million, a Margin of 8.6%. Net Income was CAD 0.4 million, or CAD 0.01 per share, and adjusted EBITDA per share was CAD 0.13.

The dividend exceeds reported earnings per share. A payment of CAD 0.022 is more than reported Earnings Per Share of CAD 0.01, so the dividend is supported by adjusted earnings and Operating Cash Flow rather than reported net income. Operating cash flow was CAD 3.7 million in the quarter. In plain terms, the dividend is funded by cash flow, not by accounting profit, which leaves little margin.

Investors should watch whether earnings grow to cover the dividend more comfortably.

Dividend Outlook

Leverage is low. Net Debt was CAD 29.1 million and net debt to adjusted EBITDA was 0.87 times, down from 1.12 times a year earlier.

Volumes are growing. Average beds serviced were 91,719, and the company signed a long-term contract with a national seniors home operator expected to add about 3,000 residents, with onboarding starting in the third quarter.

Ontario funding changes for unoccupied beds weighed on margins in the quarter.

Investors should not read the yield as a promise. The board declares each dividend, and thin earnings or funding changes could affect it.

Key Growth Drivers

New contracts are the first driver. A new contract adds about 3,000 residents.

Beds serviced are the second. They were 91,719.

Low Leverage is the third. Net debt to adjusted EBITDA was 0.87 times.

Scale is the fourth. A national network supports efficiency.

Operating cash flow is the fifth. It was CAD 3.7 million in the quarter.

Potential Catalysts

Onboarding of the new contract and third-quarter results are the main checkpoints. Any further funding changes are another.

Government regulation and funding, labour costs and contract renewals are the main outside influences.

Key Risks to Consider

Earnings risk is the first. The dividend exceeds reported earnings per share.

Funding risk is the second. Ontario funding changes reduced margins.

Contract risk is the third. Results depend on care operator contracts.

Onboarding risk is the fourth. Resident uptake under new contracts is uncertain.

Margin risk is the fifth. The adjusted EBITDA margin was 8.6%.

Valuation Perspective

Pharmacy service companies are commonly valued on Enterprise value to adjusted EBITDA and on price to cash flow. A trailing yield of 2.47% is the income measure, and operating cash flow is the better test of coverage.

Investors should compare the share price with adjusted EBITDA per share and note that the dividend exceeds reported earnings.

Investment Outlook

CareRx Corporation raised its quarterly dividend to CAD 0.022 a share, funded by cash flow, with low leverage of 0.87 times.

However, the dividend exceeds reported earnings per share and margins are thin. The income case depends on growth and funding stability.

Investors should monitor adjusted EBITDA, operating cash flow, beds serviced and the dividend.