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Bestselling Author Derek Foster on the Future of Tim Hortons

Looking to escape the rat race? Derek Foster did just that … at the age of 34. By borrowing from the ideas of great investors like Warren Buffett, Derek was able to retire by creating a portfolio of high-quality dividend-paying stocks. Today, Derek is a bestselling author of several titles, including Stop Working, The Worried Boomer, and The Idiot Millionaire.

In part 4 of my interview with Derek, I ask him about the future of Canadian coffee icon Tim Hortons (TSX: THI, NYSE: THI). Below is the transcript of our conversation; it has been lightly edited for clarity. (Here are parts 1, 2, and 3.)

Robert Baillieul: Tim Hortons has been in the news a lot with shareholder activists demanding that the company exit the United States and increase share buybacks and dividend payments. Is this the best thing for the company?

Derek Foster: I don’t know whether they [Tim Hortons] are going to be successful in the U.S. or not. They’ve had some degree of success in some select markets.

The activists want to lever up the balance sheet — borrow money while it’s cheap and buy back shares, as long as they don’t incur too much debt and put the company at risk that seems like a reasonable approach. When you borrow money, that becomes a tax-deductible expense. You’re paying dividends with after-tax dollars. If they can pay out similar rates or slightly above, it’s probably a good move.

As far as exiting the U.S., I don’t know how that’s going to play out or how long the runway is before they have success. I don’t know if they will. But either way, as a shareholder in the company, I think if they successfully expand into the United States that’s going to be good for me as a shareholder.

If they don’t, if they’re not able to crack into that market, they’re still going to own the Canadian market for a long, long time. They’re still going to make a lot of money, so existing stores don’t require a great deal of capital. It’s very, very minimal. So I would expect them to keep paying out dividends or buying back shares — and that will be very beneficial for me over the long term. I’m very happy owning that company.

Baillieul: Are you at all worried about Starbucks (NASDAQ: SBUX) or McDonald’s (NYSE: MCD) encroaching on their territory?

Foster: I think Starbucks is a different product. They have a different clientele. The average Tim Hortons coffee drinker is not necessarily the same as a Starbucks coffee drinker.

McDonald’s I’m a little bit more worried about because they have really come on strong the last few years. They have really upped their game and I have been really impressed with McDonald’s. So that would worry me to a point. But it becomes a Coke or Pepsi argument. I don’t think Tim Hortons is going to disappear. People have developed a taste for that product [Tim Horton’s] and they seem to drink it regularly. But it is something that would cause some concern I guess.

Baillieul: I can attest to that. Although I do enjoy McDonald’s coffee as well. So I’m not too sure.

Foster: [laughter] I don’t even drink coffee so I might be the wrong person to ask.

Coming up next
In the fifth and final part of my interview with Derek, I ask him about Verizon abandoning their plans to enter the Canadian telecom market and his recent U.S. investments. You can learn more about him on his website here.

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Disclosure: Robert Baillieul has no positions in any of the stocks mentioned in this article.

Fool co-founder David Gardner owns shares of Starbucks. Tom Gardner owns shares of Starbucks. The Motley Fool owns shares of McDonald’s, PepsiCo, and Starbucks.

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