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Should You Take a Bite Out of This Yummy Stock Now?

Thanks to Restaurant Brands International Inc.’s (TSX:QSR)(NYSE:QSR) latest dividend hike in February, which more than doubled its quarterly dividend, and a nice share price decline of +15% from its high, the quick-service restaurant company now offers an attractive yield of ~3.3%, which is higher than those of its peers. McDonald’s recent yield is ~2.5%, Starbucks’s is ~2%, and Yum! Brands’s is ~1.7%.

Technically…

…Restaurant Brands stock is still in a downtrend. However, it has some support at the US$53-55 per share level. If it breaks through, we could see the stock go below US$50 per share. (I look at the stock on the NYSE instead of on the TSX because the company reports in U.S. dollars.)

Why Restaurant Brands stock is down

A part of the reason for the stock’s decline is that it has been having some issues with its Tim Hortons franchisees. In my previous article, I wrote: “Restaurant Brands have conflicting interests and multiple issues to work out with Tim Hortons franchisees. Particularly, a group of Tim Hortons franchisees saw a need to form The Great White North Franchisee Association to protect the interests of franchisees as well as the original, Canadian Tim Hortons brand. As of October, half of the Tim Hortons franchisees have joined the association.”

Last year, Restaurant Brands paid net interest expense of US$512.2 million with a weighted average interest rate of 4.8% on long-term debt. Rising interest rates will likely increase the company’s cost of operation.

At the end of 2017, Restaurant Brands had US$15.59 billion of net debt. So, if the company didn’t have any costs of operation and didn’t have to pay any interest, based on its operating cash flow generated last year, it’ll take the company ~11 years to pay off its debt.

Restaurant Brands’s net-debt-to-assets ratio was ~73% at the end of 2017. The company’s high debt levels and the market’s expectation of more interest rate hikes is another reason the stock has been on a decline.

That said, Restaurant Brands is a cash cow. Last year, it generated US$1.38 billion of operating cash flow. The pullback has made the stock a good value for a bite.

A good value

Income and total-returns investors should find Restaurant Brands stock a compelling opportunity. At ~US$55 per share, the company trades at a forward price-to-earnings ratio of ~20.6, while analysts estimate it can grow its earnings per share by at least ~14.7% per year for the next three to five years.

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Fool contributor Kay Ng owns shares of Restaurant Brands and Starbucks. David Gardner owns shares of Starbucks. Tom Gardner owns shares of Starbucks. The Motley Fool owns shares of RESTAURANT BRANDS INTERNATIONAL INC and Starbucks. Starbucks is a recommendation of Stock Advisor Canada.

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