Globe and Mail business writer Jennifer Dowty.The Globe and Mail
Dividend growth can be a sign of solid earnings and confidence by management about future growth – and it's valued by investors. Listed in the attached table are a few companies that recently announced robust dividend growth along with a discussion below on one such dividend grower, Restaurant Brands International Inc.
The company
Restaurant Brands has more than 19,000 quick service restaurants worldwide across its two banners, Tim Hortons and Burger King (BK).
The investment thesis is discussed below.
- Industry leadership. Tim Hortons is the largest quick-service restaurant chain in Canada. BK is the world’s second-largest fast-food hamburger-quick-service restaurant chain, based on the number of restaurants.
- Global expansion. In 2015, the company’s restaurant count increased 4.2 per cent and grew by 4.8 per cent in the previous year. The company has room to grow, in existing markets as well as new regions. Tims is concentrated in Canada. As of the end of 2015, 83 per cent of Tims restaurants were located here, providing plenty of runway for growth beyond the Canadian border, and 48 per cent of BK restaurants were located in the United States, allowing for continued international expansion. In the first-quarter, management announced plans to expand the Tims brand in the state of Indiana as well as Ohio, and the BK brand in Spain.
- Attractive franchise model. Almost all of the restaurants are franchised. This model allows the company to generate steady cash flow as it receives a percentage of sales as well as franchise fees. This will also allow the company to steadily reduce its high debt level. In the first-quarter results, management reported a net-debt-to-adjusted-EBITDA ratio (past 12 months) of 4.7 times.
- Strong operational results. Last quarter, same-store sales at Tims increased 5.6 per cent and rose 4.6 per cent at BK. In 2015, Tims’ same-store sales increased 5.6 per cent and BK saw an increase of 5.4 per cent.
- Consistent earnings beats. For the past four quarters, the stock has rallied on better-than-expected financial results reported. Consequently, analysts have been revising their earnings estimates higher.
- New product offerings to generate traffic and sales. Earlier this year, BK added hot dogs to its menu offering. Meanwhile, Tims has had successful launches of its croissant breakfast sandwich and pulled-pork sandwich. That being said, Restaurant Brands faces fierce competition from market leaders such as McDonald’s, with its more than 36,000 restaurants worldwide. For instance, McDonald’s recently launched an all-day breakfast menu in the United States.
- Higher spending on dining out. According to sales data from the U.S. Department of Commerce, in early 2015, there was a shift to higher spending in the Food Services and Drinking Places subsector, which includes quick-service restaurants, compared with spending at grocery stores.
Dividend policy
Since early 2015, the company has announced a dividend hike every single quarter. Restaurant Brands pays shareholders a quarterly dividend of 15 cents (U.S.) a share, or 60 cents a year. This equates to an annualized yield of 1.4 per cent.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of approximately 15 times the 2017 consensus estimate. On a price-to-earnings (P/E) basis, the stock trades at a multiple of more than 25 times the 2017 consensus estimate.
Analysts' recommendations
According to Bloomberg, the one-year consensus price target is $57.23 (Canadian). This implies a potential 12-month price return of just 3 per cent.
The consensus EBITDA estimate is $1.83-billion (U.S.) in 2016, and forecast to rise 8 per cent to $1.98-billion in 2017. The Street's earnings-per-share estimate is $1.44 in 2016, increasing 16 per cent to $1.67 in 2017.
Chart watch
The stock has a limited trading history since it just began trading on the Toronto Stock Exchange and New York Stock Exchange in December, 2014.
The stock price is in an uptrend, but the share price is nearing overhead resistance around $58 (Canadian). Its record closing high was $57.92, reached in August, 2015.
There is downside support around $52, near its 50-day moving average, and failing that, around $50.
The bottom line
A great stock to own but not one to chase as the stock has rallied 7 per cent in the past two weeks – wait for a pullback. Furthermore, on the first-quarter conference call, management mentioned that sales at the start of the second quarter have declined slightly from the previous quarter. If there is any weakness in the stock price, use it as a buying opportunity.
I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action.
Restaurant Brands Int'l (QSR)
Friday close: $55.43, up 77¢
Restaurant Brands Int'l (QSR)
Friday close: $42.50 (U.S.), up 35¢
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Dividend Increase (%)
Canadian Pacific Railway Ltd. (CP-T): 43%
Quebecor Inc. (QBR.B-T): 29%
Enghouse Systems Ltd. (ESL-T): 17%
Open Text Corp. (OTC-T): 15%
Dollarama Inc. (DOL-T): 11%
Algonquin Power & Utilities (AQN-T): 10%
Badger Daylighting Ltd. (BAD-T): 10%
Enercare Inc. (ECI-T): 10%
Restaurant Brands (QSR-T): 7%
Source: Bloomberg
Jennifer Dowty