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Tim Hortons: Brewing Great Returns for Investors

In today’s volatile geo-political/economic climate, it’s reassuring to hunker down with solid companies quietly going about their business producing returns. Tim Hortons (TSX: THI)(NYSE:THI) may not be high-tech flashy, but it continues to generate cash.

The company is not without its challenges. However, forward-thinking management and overall corporate strength leads me to believe it’ll ride out Canadian storms – economic and weather-wise – in good shape.

Menu innovations and restaurant renovations

Tim Hortons likes to keep things contemporary. Coffee is coffee, but more of its menu innovations are on the specialty coffee and food side. Care for a Chocolate Dream Latte, a new Pretzel Bagel, or a new Crispy Chicken Sandwich? Your local Tim Hortons has them.

The result? Increased sales, cash flow, and customers coming back for more. In its Canadian segment, same-store sales grew by 1.6% in Q4 2013. Same-store sales grew by 3.1% in the U.S. in Q4 2013. Not earth-rattling, but positive considering the intense competition in the coffee market and the rough start to winter in Q4.

Tim Hortons is addressing same-store sales. In its Q4 2013 earnings call, CFO, Principal Accounting Officer and Executive Vice President of Finance Cynthia Jane Devine said, “We think there’s a lot of opportunity to continue to grow same-store sales in Canada. And I mean, it’s everything from the work that we’re doing at restaurants to improve throughput and to simplify the operations at restaurants.”

Tim Hortons’ Board of Directors recently approved an increase in the quarterly dividend of approximately 23.1%, to $0.32 per common share. Tim Hortons pays regular dividends. I like regular dividends — and dividend increases when they come along. It adds a shot to a portfolio like a good blast of espresso.

In Q4 2013, the company completed 139 restaurant renovations and 639 drive-thru improvements in Canada. It’s targeting 215-255 restaurant openings in Canada, the U.S. and the Gulf Cooperation Council this year.

The challenge

Everybody and their brother or sister are selling coffee, doughnuts, muffins, bagels and such. Those who aren’t, are thinking about it. Starbucks (NASDAQ: SBUX), McDonald’s (NYSE: MCD), and others are all deep into the game.

Starbucks is a different animal, catering to coffee purists in a sense, akin to those who seek luxury wines. You pay through the nose, but many noses can’t resist Starbucks’ offerings, and its unique way of preparing speciality coffees.

Starbucks has been testing alcohol sales at approximately 40 U.S. stores. This is part of its launch of an evening menu of light snacks and alcohol.

McDonald’s represents a special challenge to Tim Hortons with its extended hours, value-pricing, and extensive network of restaurants. Additionally, McDonald’s has bagged coffee now, ready to take home, just like Tim Hortons. Furthermore, it’s always pouring free coffee somewhere… and the lines are long as it seeks to sway coffee enthusiasts.

Foolish bottom line

It won’t get any easier for Tim Hortons. Nevertheless, I believe it can handle all of this competition and continue to thrive. It plans to open 800 restaurants in North America in the next five years — that’s a lot of coffee that’s going to be poured.

 

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Fool contributor Michael Ugulini owns shares of McDonald's. Motley Fool Co-founder David Gardner owns shares of Starbucks. Co-founder and CEO Tom Gardner owns shares of Starbucks. The Motley Fool owns shares of McDonald's and Starbucks.

See all posts by Michael Ugulini
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