Pedestrians walk past a Keg Steakhouse and Bar in Yaletown in downtown Vancouver, B.C. Tuesday, Nov.19, 2013.Jonathan Hayward/The Canadian Press
With a 5-per-cent yield and resilience in tough economic conditions, you might call Keg Royalties Income Fund the full-meal deal.
Last week's rate cut by the Bank of Canada highlights persistent economic weakness in Canada, and some realities for investors to absorb. Higher bond yields and GIC yields aren't anywhere close, and the pressure's off for the time being on rate-sensitive sectors like utilities, pipelines and REITs. But an analysis of the Keg by IncomeResearch.ca highlights another aspect of today's economy that investors need to understand. High-end products and services are doing well, even if the economy has probably lapsed into a modest recession.
You can see this in sales of high-end houses in Toronto and Vancouver, and nationally in the strong sales numbers posted by several luxury car companies. In IncomeResearch.ca's view, the Keg (KEG.UN), a chain of quality steak restaurants, fits into this view as well. "The Keg brand operates in the higher end segment of the restaurant sector which has proven to be relatively immune from changes in the economy," the independent analysis firm wrote in a recent note.
There are currently 102 Keg restaurants in Canada and the United States. They pay a royalty on their sales to KEG.UN, which issues distributions to investors that are largely taxed as dividends. The S&P/TSX composite index was down 1.4 per cent for the year through July 20, while KEG.UN was up 9.1 per cent. Over the past five years of economic ups and down, the index gained a total 25.3 per cent KEG.UN surged 79 per cent. Even after that run, the yield is about 5.3 per cent.
Earlier this year, KEG.UN bumped up its monthly distribution per share to 8.2 cents from the 8 cents paid since the beginning of 2012. IncomeResearch.ca credited the increase to strong same-store sales growth, and currency gains on revenues from U.S.-based outlets. "The Keg provides a stable dividend from near Canadian iconic brand name in the restaurant business," the firm writes.
In a harsh recession, investments like KEG.UN would have to be reconsidered because of the potential for a downturn in demand. But in today's economy, demand for luxury products remains strong. Steak, anyone?
Rob Carrick