The fast food industry is continually growing here in Canada. Consumers love to dine out, whether it be in a restaurant or at their favorite burger joint.
These businesses, particularly the ones that focus on quick-service restaurants, are somewhat recession-proof. As times get more difficult, when consumers choose to eat out, they gravitate towards fast food joints.
As a result, these Canadian stocks can be a stable, defensive option for Canadian investors. Most of the ones trading on the Toronto Stock Exchange pay dividends, and the royalty structure of a few we go over in this article is specifically designed to return the vast majority of their income to investors via a distribution.
With that said, let’s dive into the best restaurant stocks in Canada to own today.
What are the top restaurant stocks in Canada?
Restaurant Brands International (TSE:QSR)A&W Royalty Income Fund (TSE:AW.UN)MTY Food Group (TSE:MTY)The Keg Royalty Income Fund (TSE:KEG.UN)Pizza Pizza Royalty Corp (TSE:PZA)Diversified Royalty Corp (TSE:DIV)
Restaurant Brands International (TSE:QSR)
Restaurant Brands International (TSE:QSR) is the most popular restaurant stock in Canada. It’s one of the largest quick-service restaurant companies in the world.
The holding company engages in the operation of quick-service restaurants and has a market cap of just shy of $28B at the time of writing and is home to some of the most popular quick-service brands in North America, like Burger King, Tim Hortons, Popeyes Chicken, and most recently Firehouse Subs.
The company has more than 28,000 restaurants and operates in 100 countries globally, the bulk (nearly 20,000) being from its Burger King segment.
The company was formed in 2014 after an acquisition by 3G Capital of Tim Hortons and is now what many believe to be a blue-chip dividend payer here in Canada.
The pandemic was harsh on QSR. Not only did a large chunk of its restaurants get shut down because of lockdowns, but even coming out of the pandemic, inflation and wage demands put a lot of pressure on the company’s margins.
However, all that seems to be behind it as it is firing on all cylinders. Analyst estimates have the company growing at a high single-digit pace over the next few years, and it currently pays a low 3% dividend yield with a payout ratio in the 60% range in terms of free cash flow.
A&W Royalty Income Fund (TSE:AW.UN)
A&W Revenue Royalties Income Fund is a trust established to invest in A&W Trade Marks Inc, which through its ownership interest in A&W Trade Marks Limited Partnership, owns the A&W trade-marks used in the A&W quick service restaurant business in Canada.
In layman’s terms, the company licenses its brand to franchisors and takes an “off-the-top” fee. In A&W’s case, it is 3%. This means that A&W Royalty takes 3% of the restaurant’s revenue inside its royalty pool.
From there, it deducts expenses and pays the remainder as a distribution to its unit holders. The unique situation with A&W Royalty is that it is one of the fastest-growing quick-service restaurants in the country, primarily due to its outstanding marketing.
This royalty structure makes this a much different investment than Restaurant Brands International. Why?
For one, in an inflationary environment, shareholders stand to benefit from an investment in an off-the-top royalty company. That is because inflation ultimately increases the top line (revenue) of companies. And when the top line rises, your royalties increase.
If inflation got bad enough that prices were so high people opted out of eating at A&W, this would be a net negative. But this hasn’t been the case.
The company pays a monthly distribution of around 5%, and before the pandemic, it had just hit Canadian Dividend Aristocrat status until it had to shut down its restaurants due to government related lockdowns. I have little doubt it won’t hit the 5+ years of straight dividend growth again coming out of the pandemic. Overall it is one of the strongest fast-food stocks in Canada.
MTY Food Group (TSE:MTY)
MTY Food Group Inc is a franchisor in the quick service and casual dining food industry. The company brands include Big Smoke Burger, Cafe Depot, Country Style, Croissant Plus, Cultures, Extremepita, Fabrika, Jus Jugo Juice, Koya Japan, ManchuWok, Muffin Plus, Valentine, Van Houtte, Shushiman and others.
It does have operations in Canada and the United States, but most of its revenue comes from Canada.
The company does have a lot of exposure to shopping mall food courts, and the impact during the pandemic was catastrophic. It laid off half its workforce, suspended its distribution, and posted a significant net loss in Fiscal 2020.
However, the company is back on track, and its revenue stream has recovered to pre-COVID levels. Many analysts expect high single-digit earnings growth and double-digit revenue growth for the company over the next few years.
The company only yields in the mid-1 % range at the time of writing. So for income seekers, look at other options on this list.
The Keg Royalty Income Fund (TSE:KEG.UN)
The Keg Royalty is another small-cap royalty company on this list. With over 100 locations Canada-wide, the restaurant has a strong reputation for high-quality dine-in meals. This is a different restaurant structure than a fast-food hamburger restaurant like A&W.
However, the business models are much the same. The Keg Royalty Fund collects a 4% royalty on the gross sales of Keg restaurants in Canada and the United States.
The company is not growing as fast as a royalty fund like A&W, but it is still a strong option for those looking for exposure to the higher-end side of the restaurant sector.
It pays a 7% dividend, but an important thing to note about the Keg is unlike A&W, the dividend does not grow. The last time the company actively increased the dividend outside of a sharp recovery post-pandemic was in 2015.
Pizza Pizza Royalty Corp (TSE:PZA)
If you’ve ever watched a sporting event or any sort of television here in Canada, you’ve likely heard of Pizza Pizza. In western Canada, the company operates primarily under its Pizza73 brand, and in eastern Canada, Pizza Pizza.
It has more than 600 restaurants and primarily operates here in Canada. In 2021, the company had just shy of $500M in royalty sales and was a regular dividend grower.
The bulk of the company’s operations is in Ontario. As of the company’s most recent annual filing, it has 507 stores in Ontario. Compare this to the company’s second-largest province of exposure in Alberta, with just 99 stores, and you can see its reliance on Ontario.
The company is going through a lull in terms of new store growth. However, it’s still driving moderate same-store sales growth, allowing it to continue growing its distribution.
Overall, it’s one of the better royalty plays in Canada if you’re looking for exposure to pizza restaurants.
Diversified Royalty Corp (TSE:DIV)
Before we get into Diversified Royalty, I’d like you to know that this isn’t a pure-play restaurant royalty company. Its name is suiting for the company. It owns multiple royalty companies ranging from Mr. Lube to Air Miles to its restaurant exposure in Mr. Mikes.
The company has achieved solid system sales growth over the last five years, from under $60M in 2017 to over $140M in 2022.
The fund has a market cap of around $425M and a dividend that yields in the high 7% range at the time of update. Dividend growth has been relatively sporadic, going through multiple growth phases, flatlines, and cuts during the COVID-19 pandemic. However, it is hard to blame these companies for distribution suspensions when most of their stores were shut down.
Again, it is essential to understand that a small amount of Diversified is exposed to the restaurant sector. So if you’re looking for more pure-play restaurant stocks, you’ll want to look elsewhere.
Overall, most of the exposure to the restaurant industry here in Canada is through royalty companies
There are a lot of quality restaurant stocks on the TSX. However, for the most part, most of them will be in the royalty segment, where investors get a chunk of gross sales.
You will not participate in the restaurant’s bottom line (earnings) in the royalty pool. Still, you will also avoid exposure to rising wage pressures, costs of running the restaurant, and any other aspects of running the business.
With Restaurant Brands International, however, you are exposed to all this, which can be a benefit if the company is growing at a strong clip. It is best to determine your investment strategy and decide based on it.
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Original Source: Stocktrades
Categories: Canadian Dividend Stocks