This month, we’re adding two of the world’s leading fast-food operators—Restaurant Brands and Starbucks—to our regular TSI Dividend Advisor coverage.
Both firms are using their strong brands to expand overseas, which should continue to spur long-term earnings growth. Their embrace of new tech to drive orders and lower costs should further spur earnings and let them keep raising your dividends. Each is a buy for income investors.
RESTAURANT BRANDS INTERNATIONAL INC. $93 is a buy for aggressive investors.The company (Toronto symbol QSR, High-Growth Dividend Payer Portfolio; Consumer sector; Shares outstanding: 453.0 million; Market cap: $42.1 billion; Dividend yield: 3.3%; Dividend Sustainability Rating: Above Average; www.rbi.com) is one of the world’s largest operators of fast-food restaurants. It has 30,125 outlets in over 100 countries: 18,935 Burger King, 5,662 Tim Hortons (coffee and donuts), 4,269 Popeyes Louisiana Kitchen (fried chicken) and 1,259 Firehouse Subs. Franchisees operate almost all of those outlets.
The company has paid regular dividends since it took its current form following the 2014 merger between Canada’s Tim Hortons coffee shop chain and U.S.-based Burger King.
Restaurant Brands last raised its quarterly dividend by 1.9% with the April 2023 payment, to $0.55 a share from $0.54 (all amounts except share price and market cap in U.S. dollars). The new annual rate of $2.20 yields a solid 3.3%.
The company continues to benefit from a multi-year plan to spur its growth with more drive-thru locations, the expansion of its mobile and online ordering tech platforms, and new menu items.
Overall sales in the quarter ended June 30, 2023, rose 8.3%, to $1.78 billion from $1.64 billion a year earlier. That gain was largely due to higher selling prices in response to increased costs for food ingredients, fuel and labour. It also opened 169 new outlets (net of closures). The company earned $0.85 a share (or a total of $387 million) before unusual items, up 3.7% from $0.82 a share (or $373 million).
Restaurant Brands continues to expand overseas, particularly in India and China. In 2022, countries outside of Canada and the U.S. accounted for 12% of its total revenue.
The company cuts the risk of entering unfamiliar markets by teaming up with franchisees who operate the stores and can adapt menus to local tastes and customs.
For example, TH International Limited (“Tims China”) is the exclusive operator and developer of the Popeyes brand in mainland China. Tims China plans to open at least 10 Popeyes restaurants in Shanghai this year and 1,700 across China over the next 10 years.
Restaurant Brands’ strong balance sheet will let it keep expanding. As of June 30, 2023, it held cash of $1.21 billion, and its long-term debt of $12.80 billion is a manageable 42% of its market cap.
The company should earn $3.24 a share for all of 2023, and the stock trades at a reasonable 20.7 times that estimate.
Restaurant Brands is a buy.
STARBUCKS CORP. $94 is a buy for aggressive investors.The company (Nasdaq symbol SBUX; High-Growth Dividend Payer Portfolio, Consumer sector; Shares outstanding: 1.15 billion; Market cap: $108.1 billion; Dividend yield: 2.4%; Dividend Sustainability Rating: Above Average; www.starbucks.com) is a leading seller and roaster of specialty coffee. As of July 2, 2023, Starbucks had 19,032 company-operated stores (51% of the total) and 18,190 licenced locations (49%). That makes for a total of 37,222 outlets in more than 85 countries.
Starbucks has increased its annual dividend rate each year since it began paying dividends in 2010. The next increase comes with the November 2023 payment when the quarterly dividend will rise 7.5%, to $0.57 a share from $0.53. The new annual rate of $2.28 yields 2.4%.
In the fiscal 2023 third quarter, ended July 2, 2023, sales rose 12.5%, to $9.17 billion from $8.15 billion a year earlier. On a same-store basis, sales increased 10%. That reflects a 4% gain in the average purchase size per visit, plus a 5% rise in the number of transactions.
Despite higher spending on employee wages, benefits and training, earnings per share, excluding unusual items, improved 19.0%, to $1.00 from $0.84.
The company’s balance sheet remains sound. As of July 3, 2023, it held cash of $3.62 billion. As well, its long-term debt of $13.54 billion is a low 13% of its market cap.
Starbucks continues to open new stores, particularly in smaller U.S. cities. It’s also opening roughly three new stores in China every day. Most of these new outlets are drive-thru/pick-up only locations, which are cheaper to build and operate than traditional sit-in locations. Moreover, the company continues to use apply the latest tech to its home delivery platforms. In the latest quarter, delivery sales doubled compared to a year earlier.
Earnings for fiscal 2023 should reach $3.26 a share, and the stock trades at 28.8 times that estimate. However, the company’s growth initiatives and new stores could lift its earnings in fiscal 2024 to $4.07 a share; the stock trades at a reasonable 23.1 times that forecast.
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