Webcast #40: What Do Double-Doubles, Whoppers, and Chicken Sandwiches Have in Common? (8 minutes)

The answer is that they all share the same parent company.

Restaurant Brands has about 30,000 locations throughout the world, 65% of which are Burger King, 18% are Tim Hortons, 13% belong to Popeyes, and 4% are Firehouse Subs. The cash flow, however, is overwhelmingly earned by Tim Hortons (44% of the company’s total) and Burger King (also 44%).

Earlier in the summer, after watching the stock trade for awhile, we executed a block trade to purchase Restaurant Brands for all our clients where suitable at just over $66 per share.

Today, thanks to a strong recent quarter, it’s up about 17% to $78 per share. Their quarter – which covered April, May, and June – showed sales growth of about 14% compared to the year before, which surpassed what the analysts had expected. Now, sales are back to pre-pandemic levels.

While we believe the 5-day workweek in an office is confined to the history books, a hybrid model appears likely. The CEO of Royal Bank, which employs 89,000 people, sent a memo asking its people to show up in person more often this fall. JPMorgan and Goldman Sachs have made the same request south of the border. We expect other large companies to follow suit, meaning that urban centre activity will continue to improve, albeit gradually. Because foot traffic is still 55% below its March 2020 level in Toronto, for example, there’s plenty of room to move. As more people visit urban centres, coffee runs and take-out for lunch will benefit Restaurant Brands.

Restaurants have their appeal, even in this inflationary environment we’re currently experiencing. In the July inflation report from Statistics Canada, it showed that restaurant inflation (+7.3% compared to last year) is much less than grocery store inflation (+9.9%).

When we purchased the stock, it had about a 4.1% dividend yield. It’s now about 3.6%, which is still enticing. The stock also commands a 6% free cash flow yield, which is a good enough level to attract the attention of most investors. As the hybrid work model takes hold and consumers continue to visit restaurants that have less inflation than grocery stores, Restaurant Brands will continue to appreciate in value for its shareholders.