Wednesday, May 18, 2016

Ten Canadian Restaurants With Growing Dividends

Since my Five Canadian Utility Companies With Growing Dividends post proved both popular and personally useful, I decided to explore another sector I am interested in: Canadian restaurants.  As indicated by my Investment Holdings, I am currently only invested in one restaurant - McDonald's Corporation. Given my feeling McDonald's is overvalued (P/E ~ 24X), I wanted to look for Canadian restaurants with growing dividends. The below table contains the ten Canadian restaurants who managed to increase their dividend in the past year.

Company Name Div Yld% LTM Payout % P/LTM EPS DPS 1Yr Gr % DPS 3Yr Gr% DPS 5Yr Gr%
Diversified Royalty Corp. (TSX:DIV) 9.67 293.0 32.9 533.3 - -
Boston Pizza Royalties Income Fund (TSX:BPF.UN) 7.44 108.5 22.8 7.82 3.68 0.503
Pizza Pizza Royalty Corp. (TSX:PZA) 6.12 104.5 16.6 3.01 4.34 (1.15)
Keg Royalties Income Fund (TSX:KEG.UN) 6.01 93.8 11.4 5.76 2.03 (3.61)
A&W Revenue Royalties Income Fund (TSX:AW.UN) 5.29 95.7 19.5 4.27 1.41 2.33
Imvescor Restaurant Group Inc. (TSX:IRG) 3.61 26.8 11.9 300.0 - (23.2)
Canlan Ice Sports Corp. (TSX:ICE) 2.32 NM NM 33.3 0 21.7
Cara Operations Limited (TSX:CAO) 1.37 11.3 13.9 10.9 - -
MTY Food Group Inc. (TSX:MTY) 1.33 28.6 24.0 16.9 20.9 35.8
Restaurant Brands International Limited Partnership (TSX:QSP.UN) 1.15 78.4 51.4 444.4 - -

Here are some observations regarding the ten companies:

- Diversified Royalty Corp and Canlan Ice Sports are not solely restaurants. Diversified Royalty Corp also receives royalties from an oil change and realty franchises, while Canlan operates sporting facilities, some of which have restaurants onsite.
- The high payout ratios for the top five companies can be partly explained by their business structure of receiving and distributing royalty and licensing payments vs the actual operation of restaurants.
- The only companies on the above list with revenue generated outside of Canada are Restaurant Brands International (Tim Hortons and Burger Kings operating in over 100 countries) and MTY Food Group (10% of revenue coming from the US and the Middle East).
- Despite their impressive record of dividend growth, a recent Globe and Mail article on MTY explained why the majority of analysts that cover the company have negative views on its prospects.
- The newest member of the list is Cara Operations which went public in April 2015. In March 2016, Cara announced they had acquired the 117 St. Hubert restaurants, mainly in Quebec for $537M. As a Quebecer, I can confirm that St. Hubert's is ridiculously popular across the province and the acquisition has the potential to be a huge win for Cara.

Of the above ten restaurants, Pizza Pizza, A&W, and the Keg interest me the most. Their relatively generous dividend yields along with their recent history of dividend growth are impressive. None of the three seem expensive with P/E ratios under 20X. A&W's marketing has established a clear niche for them as a higher quality fast food operator who serve meat raised without hormones or steroids. Although I only tend to eat at the Keg once or twice a year, I am impressed with their constantly changing menu and high quality service. Although I am not a fan of Pizza Pizza's product, their brand recognition and low price points make them an obvious choice for budget friendly pizza. My further research will include looking at each company's geographical distribution of locations, historic same-store sales figures, the taxation of shareholder distributions, and royalty/licencing systems in place, among other things.

Do you own shares in any of the ten Canadian restaurants?





8 comments:

  1. I am looking to get some boston pizza restaurants. I like their business and they seems to be stable. Also, since i spend money there, I guess it will contribute to my stock :)

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    1. My brother owns some Boston Pizza stock. Interesting you mention eating there as they are looking to Quebec to grow their restaurant base.

      Good luck!

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  2. We own Keg and have been pretty happy with the return/distributions. Whenever we go to Keg, it's always packed. I like that.

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    1. Seems like you're following Peter Lynch's advice of buying what you know and like. Glad to hear their restaurants are packed in BC.

      Thanks for your input!

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  3. You may also wish to consider SRV.UN - SIR Royalty Income Fund. It has more upscale restaurants as part of its portfolio.
    MG

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    1. Thanks for the tip! Looks like they didn't make the screen given their static distribution since June 2013. That said, I do enjoy their Jack Astors restaurants.

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  4. hello dividends in hand! I've followed your blog closely and we have a decent amount of overlap in our portfolios... As you know, the struggle of finding great dividend payers on the TSX. Of the above list I own A&W. I'm very happy with the constant dividend increases however I do notice that the market doesn't really understand or know how to value this company. They'll report record earnings, record year over year same store growth an increase in the dividend and yet the stock will barley move or won't move at all. I'd still recommend it though, as the constant dividend growth is too good to ignore, but just expect little stock price appreciation. Another thing to note about A&W is its relatively low beta or negative beta and has actually been a blessing in disguise on many days when the market has been negative.
    Best of luck! Keep up the good work

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    1. Thanks for your comment Luke. Since I have no intention of selling quickly, the lack of movement of A&W doesn't particularly bother me. The lack of volume of the stock (less than 10K shares per day) is a little worrisome as I might have to pay more to establish and grow a position. Despite that, it's the Canadian restaurant I'm leaning toward. Love the multiple dividend raises and relatively low payout ratio.

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