While Restaurant Brands International’s (TSX:QSR)(NYSE:QSR) Tim Hortons and A&W Revenue Royalties Fund’s (TSX:AW.UN) A&W represent great taste and quick deliveries for most Canadians, income-seeking investors recognize them as some of the most robust income stocks on the Toronto Stock Exchange.
After McDonald’s, these two chains have more outlets and serve more customers than any other restaurant brand in the country. Just like McDonald’s, they both rely on royalty income from their franchisees to generate cash flows and pay out hefty dividends.
The concentrated nature of the quick-service restaurant industry in Canada (five brands account for 97% of burger sales) and the sizable margins of the franchising model makes these stocks ideal for investors seeking passive income. But which one comes out on top? Here’s a closer look.
At first glance, A&W’s dividend yield seems to beat RBI’s. A&W stock offers a 4.8% dividend yield, while RBI offers just over 2.8% at current market prices.
A&W offers a publicly listed security that is organized as an income fund, which means most of the income generated from the franchise fees gets distributed to unitholders. In its most recent quarter, the payout ratio was 94%. This means any slowdown or dip in sales generated by the company’s franchisees will have an immediate impact on the dividend.
Meanwhile, RBI’s payout ratio was only 84.8%. This means RBI has more wriggle room to boost dividends when sales grow or maintain dividends when sales dip. Also, RBI has over a billion dollars in cash and cash equivalents that further support this dividend payout, while A&W only has $8 million on its books, which wouldn’t even cover a single quarterly payout.
RBI clearly takes the lead when it comes to growth. Revenue has expanded at an average annual rate of 36.7% over the past five years. The company is aggressively expanding into new territories, with recent partnerships allowing the company to launch Popeyes in China and Spain, and Tim Hortons in Thailand.
Burger King, meanwhile, has over 17,745 locations spread across 100 countries.
However, after the management buyout in 1995, A&W Canada has lost its corporate connection with A&W’s global operations, which means its growth is restricted to outlets in this country. That places a cap on A&W’s potential. The company’s sales growth rate over the past five years has averaged 9.7% annualized.
The difference in underlying fundamentals of Canada’s two most well-known restaurant brands highlights why dividend investors need to look beyond the yield.
At first glance, it’s clear that A&W offers a higher yield and could help generate greater passive income. However, the company’s geographic limitations and aggressive payout policy make it less ideal for investors seeking a long-term bet.
Although Tim Hortons and Burger King owner Restaurant Brands International offers a lower dividend yield, its financial strength, conservative payout policy and potential for international growth make it a better bet than A&W.
If it’s a choice between higher returns today or steadier returns for the long term, I know where I’d place my bet.
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Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool owns shares of RESTAURANT BRANDS INTERNATIONAL INC and has the following options: short January 2020 $94 calls on Restaurant Brands International. A&W Revenue Royalties is a recommendation of Dividend Investor Canada.
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