As a dividend investor, it's important to pick businesses with robust brands that customers enjoy. Customer satisfaction translates into repeat business, which equals steady revenue and profits that can support a payout.
As owner of some of the most iconic quick-service restaurant brands in the world, Restaurant Brands International (QSR 1.03%) certainly meets this requirement. But could the stock be appetizing to income investors? Let's inspect Restaurant Brands International's fundamentals and valuation to decide.
Widely recognized brands are powering growth
Selling the rights to franchisees to own and operate Burger King, Tim Hortons, Popeyes, and Firehouse Subs franchises, Restaurant Brands is a major restaurant holding company. Considering the recognition of each of these brands, it shouldn't be surprising that franchisees are willing to bear hefty start-up costs and pay a portion of sales to the company. As a result, the Canadian-based Restaurant Brands has grown to more than 30,100 franchised locations across its umbrella of brands as of June 30.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Consolidated comparable sales growth rate | 9% | 9.6% |
| Net restaurant count growth rate | 4.1% | 4.1% |
| Net margin | 22.8% | 21.8% |
Data source: Restaurant Brands International.
The Toronto-based company recorded $1.8 billion in total revenue during the second quarter ended June 30, which was up 8.3% over the year-ago period. There were numerous reasons for this healthy top-line growth. New menu items and excellent marketing campaigns drew more customers to a growing number of franchise locations. On top of menu price increases, this helped Restaurant Brands' systemwide sales to reach just shy of $11 billion in the quarter -- a double-digit year-over-year growth rate.
The company's non-GAAP (adjusted) diluted earnings per share (EPS) increased by 3.4% over the year-ago period to $0.85 for the second quarter.
Due to a rise in advertising expenses to support more advertising and higher general and administrative expenses, total operating costs grew at an 11.2% year-over-year rate during the quarter. This led to an approximately 100-basis point decline in non-GAAP net margin in the quarter.
A lower share count as a result of share repurchases couldn't offset reduced profitability, which is why adjusted diluted EPS growth lagged total revenue growth for the quarter.
As the success of Restaurant Brands' franchises attracts more prospective franchisees, systemwide sales and total revenue should also grow. Analysts believe that the company's adjusted diluted EPS will climb by 7.3% annually over the next five years.
Image source: Getty Images.
A payout that is sustainable
Restaurant Brands' 3.2% dividend yield is more than double the S&P 500 index's 1.6% yield, something income investors will certainly appreciate. And the dividend looks like it should be able to keep ascending in the years ahead.
This is because Restaurant Brands' dividend payout ratio is set to register at less than 68% in 2023. For many other players in the restaurant industry, this would be a high payout ratio. But since Restaurant Brands doesn't use its own capital to open restaurants, the company's capital needs are lighter. So retaining roughly one-third of its profits is more than enough for the company to execute share buybacks and repay debt.
The stock could be a buy
Shares of Restaurant Brands have surged 19% higher in the last 12 months. Yet, the forward price-to-earnings (P/E) ratio of 20.1 remains moderately lower than the restaurants industry peer average forward P/E ratio of 23.3. This modest valuation is probably why analysts have an average 12-month share price target of $80, which would be 14% upside from its recent $70 share price.
Restaurant Brands' generous dividend, fair growth prospects, and discounted valuation make the stock worth considering for income investors.
