MTY Food Group (TSX: MTY) has had a difficult few years, losing roughly half its market value since early 2023. Softer consumer spending, persistent food and labour cost inflation, and underperforming corporate-owned restaurants have weighed on its financial performance. Meanwhile, debt accumulated through historical acquisitions has added weight to its valuation. However, a substantial dividend hike and an ongoing business restructuring could be the pivot investors are looking for.
Last month, MTY raised its quarterly dividend by an impressive 35% to $0.50 per share, extending its five-year dividend growth streak. The announcement appears to have lifted investor confidence, with shares gaining approximately 5% since then. But does this turnaround signal make the stock a buy, or should investors wait for stronger evidence?
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MTY Food Group’s business
MTY is a consumer discretionary stock that operates as a restaurant franchisor and operator, managing a diversified portfolio of more than 80 restaurant brands across 6,966 locations in North America and internationally.
Its business model generates revenue through recurring royalties and franchise fees, typically ranging from 2% to 9% of franchisees’ gross sales.
Although more than 97% of its locations are franchised, franchise operations contribute only approximately 34% to 37% of consolidated revenue. This apparent discrepancy reflects accounting differences: corporate-owned restaurants record their full sales as revenue, whereas franchised locations contribute only MTY’s royalties and fees.
This distinction matters because franchising generally offers higher margins, lower capital requirements, and more predictable cash flows. Strengthening this asset-light business model could therefore improve profitability and financial flexibility over time.
A turnaround is underway, but the numbers remain weak
MTY is responding to challenging operating conditions through a strategic restructuring. Its priorities include closing underperforming corporate-owned restaurants, optimizing its brand portfolio, returning to an asset-light franchising model, and improving operational efficiency.
The company closed 74 net locations in the third quarter (Q3). Corporate-owned restaurants now represent just 2.6% of its network, down from 3.6% last year. Additional planned closures are expected in Q4.
Although shrinking the network may appear concerning, eliminating weaker locations could reduce operating losses and allow management to concentrate resources on stronger opportunities.
Nevertheless, investors should not overlook the financial headwinds. Year-to-date, revenue declined 7.6% to $825.4 million, while adjusted EBITDA (a cash flow proxy) fell 11% to $179.7 million. Operating cash flow dropped 12% to $121.5 million, and free cash flow (after lease payments) decreased 3.6% to $89.7 million. Diluted earnings per share (EPS) also declined 10% to $3.38. System sales and digital sales fell 3.0% and 0.8%, respectively.
These figures indicate that MTY remains a wait-and-see story.
Is the big dividend safe?
At $32.75 per share at the time of writing, MTY offers a dividend yield of roughly 6.1%. Encouragingly, its free cash flow payout ratio is approximately 30%, suggesting the increased dividend has a reasonable cash flow cushion. The analyst consensus price target also implies a discount of about 14%.
Foolish takeaway
MTY is not necessarily a bargain simply because its shares have fallen about 50% from its multi-year highs. However, its big dividend, relatively modest payout ratio, established franchise network, and restructuring initiatives make it worth watching.
Investors willing to tolerate near-term uncertainty could consider a gradual position, while more cautious investors may prefer to wait for improving earnings, cash flow, and comparable sales.
If management executes successfully and consumer demand stabilizes, MTY could deliver both attractive income and meaningful capital appreciation with valuation expansion potential over the next few years.
