Restaurant Brands International Inc.'s stock has lost its sizzle, even though the home of the Whopper and the double-double just doubled its dividend.
For investors, this could be a good time to place an order.
Since Restaurant Brands (QSR) was formed in 2014 following the merger of Tim Hortons and Burger King, its formerly bite-sized yield attracted little interest from income-oriented investors.
But that changed on Feb. 12 when the company – which also owns Popeyes Louisiana Kitchen – hiked its payout by 114 per cent to US$1.80 annually, which equates to a yield of about 3 per cent. Let's take a closer look at the company to see why, for long-term investors, Restaurant Brands could hit the spot.
The stock is well off its highs
Even after the recent dividend increase, which was announced along with strong fourth-quarter results, shares of Restaurant Brands are still down about 14 per cent from their high in October. The weakness reflects several factors, including rising interest rates, competition in the fast-food industry and negative publicity surrounding Tim Hortons in Canada, where disputes between the company and its franchisees and protests over the treatment of employees have been making headlines. In yet another setback for the coffee-and-doughnut chain, a virus hit point-of-sale terminals in hundreds of Tims stores this past week.
But the problems at Tims will almost certainly get resolved, which could make the stock's current slump a buying opportunity. "How the franchisee disputes are ultimately resolved remains unknown, but we believe all parties are making too much money to jeopardize the platform or business overall," CIBC World Markets analyst Mark Petrie said in a note.
The cash keeps coming
Restaurant Brands is a cash-flow machine. Mr. Petrie expects the company to throw off about US$3.30 in free cash flow (FCF) per share in 2018, "offering what we believe to be excellent value at a FCF yield of 5.5 per cent vs. the peer-group median of 4 per cent." (Free cash flow is generally defined as operating cash flow minus capital expenditures and measures the cash available for dividends, debt reduction, expansion and other purposes.)
Moreover, Restaurant Brands offers superior diversification, menu innovation and growth potential compared to many of its competitors, along with a singular focus on cost controls, Mr. Petrie said. Even after the hefty dividend hike, the company should be able to continue to de-lever its balance sheet, which had about US$11.2-billion of net debt at the end of 2017, and pursue acquisitions, he said.
The business keeps growing
Tim Hortons's same-store sales growth has been sluggish of late, rising just 0.1 per cent in the fourth quarter. But Burger King's same-store sales rose a healthy 4.6 per cent. Same-store sales aren't the only growth engine, however. All three of Restaurant Brands' chains are opening new outlets both domestically and in international markets. Last year, the total restaurant count grew by 5.8 per cent, and there is plenty of expansion ahead.
In a recent note, RBC Dominion Securities analyst David Palmer said the company should be able to generate long-term revenue growth of about 7 per cent – 5 per cent from new restaurants and 2 per cent from same-store sales – which will drive long-term earnings per share growth of about 15 per cent.
The valuation is reasonable
Trading at about 22 times estimated 2018 earnings, Restaurant Brands' shares don't look particularly cheap. But taking expected growth into account, the PEG ratio – the price-to-earning ratio divided by the projected earnings growth rate – is a more reasonable 1.5. That, in addition to a free cash flow yield of more than 5 per cent and a dividend yield of 3 per cent that is well above fast-food peers, makes the stock attractive, Mr. Palmer said. He and Mr. Petrie are among eight analysts who have a buy or equivalent rating on the shares. There are five holds and no sells, and the average price target is US$74.09 ($94.33), according to Thomson Reuters. The shares closed on Tuesday at US$58.86 on the New York Stock Exchange and $75.19 on the Toronto Stock Exchange.
More dividend hikes to come
Even before its big dividend hike, Restaurant Brands had been steadily increasing its payout, and that growth will almost certainly continue. One reason the company could afford such a large dividend increase was that it recently redeemed about US$3-billion in preferred shares yielding 9 per cent that it had issued to Warren Buffett's Berkshire Hathaway Inc. to help finance the purchase of Tim Hortons. The redemption, in addition to other changes in the company's capital structure, "meaningfully reduced our cost of capital and … will benefit our cash flow generation in 2018 and beyond," chief financial officer Matthew Dunnigan said on the fourth-quarter conference call.
It's impossible to know what Restaurant Brands' shares will do in the short run but, over the long run, I expect that the company's sales, earnings and dividends will continue to grow, which should satisfy investors' appetites for both capital gains and income.
The author does not own shares in Restaurant Brands.