Shares of Restaurant Brands International (NYSE:QSR) are up double-digits since the global fast-food chain released preliminary fourth-quarter 2018 results. The Burger King, Tim Hortons for those north of the border, and Popeyes Louisiana Kitchen parent company reported strong growth in same-store sales and total net store sales, but perhaps the biggest news was a big increase to the dividend payout. After a strong finish to 2018, though, Restaurant Brands' stock might be a little pricey.
Fourth quarter by the numbers
Restaurant Brands said that global same-store sales (a combination of foot traffic and average guest ticket size) grew 1.9% at Tim Hortons, 1.7% at Burger King, and 0.1% at Popeyes. Net restaurant growth (which adds in sales from new restaurant recently opened) grew 2.1% at Tim Hortons, 6.1% at Burger King, and 7.3% at Popeyes.
That's a continuation from the strong showing during the third quarter, when net sales at Tim Hortons increased 2.7%, 6.1% at Burger King, and 7.6% at Popeyes. With 2018 ending on a high note and net profits doubling through the first three-quarters of the year, management thought it was time for a pay raise. The quarterly dividend was raised to $0.50 per share, with the plan to pay $2.00 for the whole year, up from $1.80 last year. That's good for for an annualized yield of 3.2% as of this writing.
New stores and a rumored takeover
Burger King and its fast-food cohorts have had a busy year. When not trolling its biggest competitor, McDonald's (NYSE: MCD), with meal deals, the company has been building new locations (over 1,300 net through the end of the third quarter), accelerating the development of its newest family addition (Popeyes) around the globe, and refining its advertising and mobile apps.
On the same day the fourth-quarter preliminary report card was released, news also broke that Restaurant Brands is mulling over the purchase of struggling Papa John's International (NASDAQ: PZZA). A potential acquisition and positive existing business progress aside, though, Restaurant Brands' stock may have already priced in significant growth. As 2018 neared its end, the company's operating income and free cash flow started to show signs of a cool-off. In spite of that, the stock trades at a 12-month forward price-to-earnings (P/E) valuation of 22.9, compared to a forward P/E of 15.7 for the S&P 500 Index.
Thus, a lot is hinging on Restaurant Brands continuing to serve up strong bottom-line returns, a difficult task given the competitive landscape in the world of burgers. Consumers are eating out -- as indicated by the 6.2% rise in total spending at restaurants and bars in 2018 reported by the U.S. Census Bureau, and the industry average 2% increase in same-store sales as reported by research group TDn2K. So, what's the problem? Too many new restaurants are being built around the country, thinning out crowds at existing stores and lowering the average location profitability.
Granted, much of Restaurant Brands' growth is coming from outside of the U.S., a winning trend as of late for the company. Nevertheless, North America is still the key geography for the chain, and paying a premium for the stock with risk of a looming slowdown might not be the best timing. For investors looking for income, the dividend is one of the restaurant industry's best, but for everyone else, I don't think the yield is worth a purchase -- at least not at the moment.