Which Is the Better Dividend Investment: Tim Hortons Inc. or Canadian Tire Corporation Limited?

Is Canadian Tire Corporation Limited (TSX.CTC.A) or Tim Hortons Inc. (TSX:THI)(NYSE:THI) a better pick for dividend investors?

| More on:
The Motley Fool

You might not think it, but Tim Horton’s Inc (TSX: THI)(NYSE: THI) and Canadian Tire Corporation Limited (TSX: CTC)(TSX: CTC.A) have a lot in common.

Both companies pay reliable dividends, have been in business for decades, and represent all-things Canadiana. And unless people from B.C. to Newfoundland stop drinking coffee or buying snow shovels, both firms will likely be rewarding shareholders for decades to come.

That’s why these dividend champions are favourites amongst income investors. But if you can’t buy both, it can be tough to choose between these two wonderful businesses. Let’s see how these two stocks stack up against one another on seven key criteria:

1. Dividend history

Canadian Tire has a great history of rewarding shareholders. The company started paying dividends to investors in 1999 and has hiked its distribution on 11 occasions over that time. Timmies is no slouch, either. Since going public in 2006, Tim Horton’s has paid a dividend to shareholders every single year. Winner: Canadian Tire.

2. Dividend safety

Of course, we also want to measure a company’s ability to maintain those dividends in the future. Canadian Tire has about $3.10 in debt for every dollar it earns before interest, taxes, depreciation and amortization, or EBITDA. That gives it lots of financial wiggle room if business sours.

However, following its merger with Burger King Worldwide, Tim Horton’s will have $7.60 in debt and preferred shares for every dollar in EBITDA earned. That means the coffee giant’s payout could be at risk if interest rates rise or margins tighten. Winner: Canadian Tire.

3. Dividend yield

Not hard to pick a winner here. While neither stock boasts a big yield, Canadian Tire’s 1.7% payout is the highest of the two. So, this stock is your first choice for current income. Winner: Canadian Tire.

4. Moat

In the same way a moat protected a castle from attackers, a competitive advantage can protect a business from competition. If a company can earn high returns on invested capital, then that suggests it has a strong position in the marketplace. Over the past five years, Tim Horton’s and Canadian Tire have earned 26% and 9% average returns on invested capital respectively.

This makes sense. While most people would probably shop around for the best price on auto parts or home appliances, they’re won’t skip their morning Tim’s run even if it costs more. That means Tim Horton’s will likely crank out larger returns in the decades to come. Winner: Tim Horton’s.

5. Dividend growth

Dividend hikes put more cash in your pocket and sends a signal of confidence for the business. Afterall, executives are unlikely to raise investor expectations if they couldn’t deliver. And since 2006, Tim Horton’s has increased its dividend at a 20% annual clip, handily beating Canadian Tire.

However, given Tim’s rocky balance sheet, you can expect most of its future cash flows will be directed towards debt repayments. Over the next five to ten years, Canadian Tire is much more likely to deliver big dividend hikes. Winner: Canadian Tire.

6. Earnings growth

Of course, future dividend hikes require growing profits. Based on analyst estimates compiled by Reuters, Canadian Tire is expected to grow earnings per share at a 8% compounded annual clip over the next five years. However, here Tim Horton’s wins by a hair. Over that same time period, the coffee giant is expected to grow earnings per share at a 10% yearly clip. Winner: Tim Horton’s.

7. Valuation

A wonderful business can still be a bad investment if you overpay for the stock. Investors are betting that Burger King will be able to unlock a lot of value out of Tim Horton’s. That’s why the stock trades at more than 30 times trailing earning.

Is that reasonable? It’s a hefty price tag for a mature restaurant business. Canadian Tire, in contrast, trades at a more modest 16 times trailing profits. Winner: Canadian Tire.

The foolish bottom line

Both Tim Horton’s and Canadian Tire are wonderful businesses that will crank out dividends for years to come. That said, following its merger with Burger King, Timmies is going to be saddled with a lot of debt. The company’s days of double-digit dividend hikes are over. That’s why Canadian Tire has the edge in my books.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robert Baillieul has no position in any stocks mentioned.

More on Dividend Stocks

money cash dividends
Dividend Stocks

The 2 Stocks Every Dividend Investor Should Own for Reliable Cash

Dividend stocks offering consistent and reliable returns can be a crucial asset in any portfolio, especially for income-producing dividend portfolios.

Read more »

grow dividends
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

These top TSX dividend-growth stocks now offer yields above 7%.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

TFSA: 2 Canadian Stocks to Buy and Hold for Tax-Free Gains

Building a large, tax-free nest egg in your TFSA with growth stocks can give you more control over your tax…

Read more »

Women's fashion boutique Aritzia is a top stock to buy in September 2022.
Dividend Stocks

May Boycotts: Is Loblaw Stock in Trouble?

Even extreme fluctuations in consumer purchasing patterns may not impact a stock as aggressively as demoralizing actions like boycotts.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Want $2,000 in Annual Dividends? Invest $27,000 in These 3 Stocks

These three top dividend stocks could help earn a stable passive income.

Read more »

edit Sale sign, value, discount
Dividend Stocks

3 Absurdly Cheap Stocks to Buy and Hold for Years

Looking for some great stocks to buy for long-term growth? Here are three absurdly cheap stocks that are impossible to…

Read more »

Canadian Dollars
Dividend Stocks

Earn $100 Monthly With a Simple $17,025.75 Investment

A less than $20,000 investment in a high-yield energy stock can produce $100 every month.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

Innergex Cut its Dividend: Is the Stock Still a Buy?

While a dividend cut is bad news for existing investors, it may present a good buying opportunity for new investors.

Read more »