Restaurant Brands Inc (TSX: QSR)(NYSE: QSR) is a fast food juggernaut. Formed by the $12.5 billion merger between Burger King and Tim Hortons, it is easily the nation’s biggest restaurant company. Best known for its two predecessor companies, it also owns Popeyes Louisiana Kitchen, a well-known fried chicken chain. In the first 29 days of January, Restaurant Brands delivered a spectacular one-month return of 19%. The rally came after a weak 2018, which saw the stock shed some 10% of its value; however, last month’s rally took it back above its 2017 closing price.
It’s clear that Restaurant Brands is off to a great start this year. The question investors need to ask themselves is why it’s doing so well, and whether the current trend can be expected to continue. To answer those questions, we first need to look at the company’s Q3 results.
Q3 Results
Restaurant Brands had a strong Q3. It grew revenue by 2.8%, same store sales by around 1%, and diluted EPS by a whopping 45%. If that 45% earnings growth figure makes you salivate, it might be worth pointing out that adjusted EPS growth was more modest at 8.6%. Regardless, we’re seeing solid growth here all around.
Among Restaurant Brands Holdings, Burger King and Popeyes have been the strongest growers, at 7.9% year-over-year. Tim Hortons lagged behind, with just 2.8% sales growth. In terms of same store sales growth, however, Tim Hortons was in second place with 0.6% year-over-year growth.
Tim Hortons’ sales rising
If Tim Hortons’ sales growth doesn’t look frothy to you, it helps to keep in mind that this past quarter’s results were much better than previous ones. Q3’s same store sales results were the best the company posted in two years, which is particularly impressive because this particular metric doesn’t necessarily increase indefinitely. Overall sales growth of 2.8% might not sound like much, but recall that the company spent much of the past three years downsizing, particularly in its international operations, which saw its U.S. headquarters eliminated in 2015 (along with 127 jobs).
Dividend income
A final point worth mentioning about Restaurant Brands is that it’s a dividend stock, with a 3.22% yield at the time of writing. That’s a good yield in itself. But what’s really incredible about this company’s dividend is that it more than doubled between 2017 and 2018, rising from $0.21 to $0.45. And just recently, management raised the payout again, from $0.45 to $0.5. That is absolutely phenomenal dividend growth, and it may partially explain why the stock has been riding high.
There’s nothing dividend investors like more than payout increases, and when your dividend goes up 114% one year, then 10% the next, the market takes notice. It’s probably unrealistic to expect Restaurant Brands’ dividend growth to continue like that forever. But with a payout ratio of just 46%, there’s plenty of room for more increases, which may in turn drive the stock price up going forward.
