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Restaurant Brands' Dividend Keeps Heating Up

R.J. Hottovy, CFA

R.J. Hottovy: Restaurant Brands International, the parent company of Burger King, Tim Hortons, and Popeyes Louisiana Kitchen, has quietly become one of the more intriguing dividend stories in the restaurant space today. On its most recent quarterly update, the company effectively doubled its dividend payout ratio, now paying $1.80 annually, representing a 3% dividend yield. This puts the company in the upper echelon of dividend yields in the restaurants space today, even after Restaurant Brands and a number of its competitors have sold off company-owned locations of franchisees, taken on additional debt, and used those proceeds to return cash to shareholders. We expect the payout ratio to remain comfortably above 60% for the foreseeable future and grow at a high-single-digit clip.

Our confidence is backed by the company's unique master franchisee joint venture structure, where it assigns franchising rights in a given region to a well-established, well-capitalized player. With the company making some brand acquisitions the past couple of years, including Tim Hortons and Popeyes, we believe these master franchisee joint venture partners will have a lot of brands at their disposal to grow over the next several years, and in fact, expect the company to grow its top-line at a healthy mid-single-digit clip, thus giving us confidence in the company's ability to pay out a dividend.

Because of the annuity-like structure, restaurant franchisers have typically been a very reliable source of dividend payout and dividend growth over the past. However, we do see two potential risks to our projections on dividend growth for Restaurant Brands International. The first is a threat of a large acquisition. The company has been acquisitive the past couple of years, but there's rumors circulating that the company may be looking for a larger brand, like Domino's Pizza, Yum! Brands, or another large QSR chain. While the company has historically been able to balance acquisitions with dividend payouts, something this large may disrupt the company's potential to make a payout.

The second is the threat of a recession. While we're not anticipating anything like the Great Recession that we saw in 2008 and 2009, restaurants have generally had a pretty strong track record the past decade and could be due for a cyclical downturn. This could potentially impact sales at Restaurant Brands International's locations, which would impede the royalties they receive from franchisees and in turn could disrupt the company's ability to pay out a dividend. However, looking across this space, this is one of the most globally diversified and well-run companies in the restaurant industry. We think that they would have one of the best chances to maintain a dividend payout even under these circumstances.