My Favourite Dividend Growth Stock Is Trading at a Vast Discount to Intrinsic Value

Restaurant Brands International (TSX:QSR)(NYSE:QSR) is a deeply discounted dividend-growth stock that I’m a raging bull on. Here’s why.

| More on:

Image source: Getty Images.

Restaurant Brands International (TSX:QSR)(NYSE:QSR) is the largest Canadian holding in my portfolio, not only because it has a juicy 3.1% dividend yield, but also because management has found a way to achieve an above-average level of growth at a below-average magnitude of risk.

The result is a risk/reward trade-off that I believe is among the best in the industry (if not the entire Canadian market).

For those unfamiliar with Restaurant Brands, it’s the parent company behind Burger King, Tim Hortons and, most recently, Popeye’s Louisiana Kitchen. The company came to be thanks to the help of the Sage of Omaha Warren Buffett, who’s since been paid back $3 billion for his preferred stake. Although Buffett doesn’t have as much stake in the company today, he still retains a small stake, as he’s still very much a fan of the folks working behind the scenes.

Most recently, Restaurant Brands’ management has been under fire over excessive cost cuts and a poor relationship with a handful disgruntled franchisees, many of which expressed their irritations through the Great White North Franchisee Association (GWNFA).

The seemingly never-ending series of negative headlines was a drag on the company’s shares over the past year.

Although Restaurant Brands’ management did make a few poor decisions, I believe the turmoil that ensued was overblown beyond proportion courtesy of the GWNFA, which appeared to have exacerbated matters such that every single disagreement had to make the front-page news.

Disputes between franchisees and franchisors are nothing new, as they’re playing a zero-sum. Franchisees want to keep more money, and management wants to ensure a fair distribution between themselves, franchisees, and shareholders.

You bring in a new management team and you can be sure that trouble will brew — and not your steeped tea double-double with skim milk.

While Restaurant Brands’ management had a tough time ironing out the wrinkles with Tim Hortons franchisees, I believe the whole debacle is nothing more than a learning experience that won’t affect the company’s long-term growth story. As such, I think the current discount in shares is a terrific entry point for dividend-growth investors who are looking to get a dollar for a dime.

While some of the widely publicized headlines did do some damage to the Tim Hortons’ brand, a majority of the others were on non-material events that just exacerbated the volatility in an already volatile situation.

What does an isolated incident involving flying feces at a Langley Tim Hortons have to do with the stock price of Restaurant Brands as a whole? In a rational world, nothing. Given the irrational behaviour of investors, however, I wouldn’t be surprised if a handful of investors sold on that news.

Don’t discount the ability of Restaurant Brands’ intelligent management team

Restaurant Brands’ Brazilian managers in 3G Capital are well-known for driving operational efficiencies and very deep cost-cutting. They’re seasoned veterans when it comes to creating long-term shareholder value, and they know how to pull the levers to achieve optimal levels of profitability and ROE (40.1% TTM).

They’ll go to extreme lengths to provide a high rate of return for shareholders, but as we discovered in the case of Tim Hortons, overly aggressive cost-cutting practices conducted did more harm than good. There’s only so much juice you can squeeze out of an orange until your hands become cramped.

The cost cuts at Tim Hortons went a bit too deep, causing bleeding to ensue in the form of disgruntled franchisees and backlash from employees.

This was a hiccup from a very experienced management team, but it’s a much-needed learning experience that’ll be invaluable for the firm moving forward, as it continues to acquire, improve, and expand. Nobody said the M&A business model was going to be a smooth ride, but for long-term shareholders, the rewards for hanging in there are astronomical.

Foolish takeaway

Restaurant Brands is absurdly undervalued given the longer-term growth opportunity at hand. New menu items and renovated stores are going to fuel same-store sales growth numbers while management puts its foot on the expansion pedal for all three of its chains.

Profound growth opportunity exists as Tim Hortons heads to China while Popeyes moves in on the Philippines market to compete with the likes of Jolibee.

Stay hungry. Stay Foolish.

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 Joey Frenette owns shares of RESTAURANT BRANDS INTERNATIONAL INC. The Motley Fool owns shares of RESTAURANT BRANDS INTERNATIONAL INC.

More on Dividend Stocks

Dial moving from 4G to 5G
Dividend Stocks

TFSA Investors: Invest $3,000 for $2,150 in Income Every Year 

If you spend time in the market, you can chart out a plan to earn $2,150 in annual passive income…

Read more »

analyze data
Dividend Stocks

3 Top Dividend Stocks to Buy and Hold Forever

These three dividend stocks on the TSX today have offered substantial gains in the last year and could prove strong…

Read more »

analyze data
Dividend Stocks

3 Surprising Stocks Trading Lower in 2023

Some of the weakest performers of 2023 (so far) may be powerful additions to your portfolio in the right market…

Read more »

Golden crown on a red velvet background
Dividend Stocks

3 Surefire Dividend Aristocrats That Are No-Brainer Buys in 2023

Cash flow-rich companies such as Fortis and Canadian Utilities should be part of your dividend portfolio in March 2023.

Read more »

Airport and plane
Dividend Stocks

Down by 20%: Is Air Canada Stock a Buy After its Earnings?

Air Canada stock continues trading for a significant discount after its earnings release, but it still might not be a…

Read more »

Dividend Stocks

Better Buy for TFSA Passive Income: Fortis Stock or Enbridge?

Fortis and Enbridge stock look cheap today for a TFSA targeting passive income.

Read more »

grow dividends
Dividend Stocks

These 3 Stocks Could Grow (at Least 5X) in the Next Decade if They Repeat History

Three stocks could soar by least five times more if they repeat history with the return of a bull market.

Read more »

work from home
Dividend Stocks

3 Stocks to Hold for the Next 20 Years

Are you looking for some stocks to hold for 20 years or more? Here are three great options to consider…

Read more »