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A cup of Tim Hortons coffee (CHRIS YOUNG/Chris Young/CP)
A cup of Tim Hortons coffee (CHRIS YOUNG/Chris Young/CP)

Rob Carrick

Tim Hortons serves up a valuable IPO lesson Add to ...

Dollars to doughnuts, you won't find a better lesson stickhandling your way through a hyped initial public offering than Tim Hortons .

The March 2006 Tim Hortons IPO was certifiable circus, with daily updates in the press in the preceding days. The stock soared on the first day of trading, sank below its issue price in the ensuing months and then bounced around some. Today, the stock is well above its issue price and has passed along several dividend increases.

Investors who succumbed to the hype over the Tim Hortons IPO have done OK - this isn't the story of a much anticipated deal that fizzled. But the smarter play here for the buy-and-hold investor was to be patient and let all the excitement die away before buying in. Consider that a model for handling all IPOs, unless you're a quick-flip artist looking to score and move on.

Tim Hortons, established back in 1964, was merged with the burger chain Wendy's International in 1995. Wendy's described the decision to sell off part of the doughnut chain a decade later as a change in corporate strategy, but the company has also been under pressure from shareholders to spin off the strong Tim Hortons franchise. Regardless, Wendy's was going to have no trouble selling those Tim Hortons shares because demand from both individual and institutional investors was tremendous.

In fact, just 16 per cent of the IPO was set aside for retail investors, a move that ultimately worked to the advantage of savvy types who were able to dump their shares shortly after the deal was done with a tasty profit.

Tim Hortons shares were at first going to be priced in the $21 to $23 range, but Wendy's quickly realized that the market would bear a higher price and, ultimately, the shares were sold at $27. Leading up to the date of IPO, the storyline on the deal was the frustration of retail investors who wanted to buy a piece of the ubiquitous chain but were thwarted by the lack of available shares. Later on, a spokesperson for one of the bank-owned brokerage firms involved in the IPO said demand for the shares exceeded supply by 37 times. This helps explain why shares of Tim Hortons surged as high as $37.99 on the first day of trading, and closed at $33.10, up about 22.5 per cent.

It was at this point that the smart money hit the road because over the next several months the shares gradually tumbled to just below the issue price. If there was ever a smart time to buy Tim Hortons shares for the long term, this was it.

Not that the stock has been a one-way ride to profit. Like most other stocks, Tim Hortons fell hard in the bear market triggered by the global financial crisis. But its overall trajectory since the IPO hype faded away has been just what many long-term investors hunger for. Share price gains? Got 'em - Tim Hortons shares had posted a compound average annual return of about 8 per cent since the summer of 2006. Dividends? Got 'em again. Tim Hortons has increased its quarterly payout to 13 cents per share from 7 cents, enough to qualify it as a good little dividend-growth stock.

The next time a hotly anticipated IPO is announced, remember the Tim Hortons example. Jumping in early worked only to the benefit of the savvy investors who were looking for a quick profit. The patient investors who waited a while to buy in have done at least as well.

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Follow on Twitter: @rcarrick

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