It has been a turbulent time for Wendy's (NYSE:WEN), with the square-burger specialist struggling with inconsistent comps and negative PR surrounding the fraudulent finger fiasco. If that wasn't enough, the company has also had to deal with an outspoken institutional owner -- Pershing Square Capital Management -- which was pushing for a number of reforms intended to unlock shareholder value. Last week, though, management conceded that maybe a massive corporate restructuring wasn't such a bad idea, and the announcement alone gave Wendy's shareholders an entire year's worth of gains in the span of a few hours.
After dishing out a basket of newsworthy developments Friday, Wendy's enjoyed its biggest one-day rally in 16 years, with the stock climbing more than 14% to reach an all-time high. Wendy's decided to unload an 18% chunk of its Tim Horton's coffee-and-doughnuts chain through an IPO within the next few quarters. The company also hinted that there might be a tax-free spinoff of its remaining interest to shareholders.
Given the reaction, some may have mistakenly assumed that Tim Horton's has been a drain on Wendy's resources. Actually, it has been a source of consistent growth and through the first half of the year represented nearly 30% of Wendy's sales and two-thirds of its operating income. Over the last five years, the number of Tim Horton's outlets has swelled to more than 2,700, while same-store sales in doughnut-friendly Canada have jumped 7% annually.
While Wendy's will lose a major growth driver in the Tim Horton's spinoff, the loss will address one frequent complaint -- that Wall Street has long undervalued the fast-growing operation. Furthermore, Tim Horton's should have little trouble funding its growth internally at this point; last year it generated $247 million in profits on revenues approaching $1 billion.
It's premature to put a dollar figure on the proceeds of the sale, but Wendy's did say the money would be used to help fund a $1 billion stock repurchase program. To put that amount in perspective, the entire company has a market cap of $6 billion, so at current prices the buyback would encompass roughly one-sixth of the outstanding shares.
But the good news doesn't end there. Management has also decided to boost the firm's annual dividend payout by 25% -- from $0.54 to $0.68. That will lift Wendy's yield to 1.3%, bringing it more in line with the market average. With an expected payout ratio of just 23% to 27%, though, there is still room for additional increases.
The company has also taken steps to strengthen its balance sheet, and has announced plans to pay down debt by $100 million by the end of the year.
As the second quarter's soft results illustrate, though, Wendy's still has plenty of work ahead. Its 6,700 locations trail McDonald's (NYSE:MCD) 31,000 stores and YUM! Brands' (NYSE:YUM) 33,000 total restaurants, but there is a renewed focus on quality over quantity. To improve performance at the unit level, Wendy's will reduce the number of company-owned stores, close underperforming locations, shed substantial real estate assets leased to franchisees, and cut new store development in half.
Wendy's has given investors plenty of food for thought, but the changes appear to be more than satisfying.
Sink your teeth into these Takes:
Fool contributor Nathan Slaughter wonders why Wendy's can't have a vanilla Frosty. He owns none of the companies mentioned.
