More growth or saturation in sight for Restaurant Brand?

QSR - Restaurant Brands International

Restaurant Brands International is a leading quick-service restaurant company in the world. Burger King, Tim Hortons, and Popeyes are its largest and most popular brands. Tim Hortons is one of the most loved restaurant brands in Canada.

Restaurant Brands operates over 26,000 restaurants, including more than 18,000 Burger King restaurants, 4,800 Tim Hortons’ restaurants and 3,100 Popeyes restaurants worldwide. In all, the company has more than 2500 franchises in over 100 countries.

The company focuses on localized menus and quality food ingredients in order to attract consumers. It operates through three reportable segments Tim Hortons (TH), Burger King (BK), and Popeyes Louisiana Kitchen (PLK). Tim Hortons is the largest accounting for 50% earnings, followed by Burger King (42%) and Popeyes (8%).

Investment Data

Revenue Growth & Market Exposure

All of QSR’s restaurants are franchised. The company earns most of its revenues from royalties which are based on a percentage of sales reported by its franchise restaurants and franchise fees. Most of its brands are leading food stores in the world. Burger King is the second largest fast-food hamburger chain, while Tim Hortons is one of the largest restaurant chains operating in the quick-service segment in North America and Popeyes ranks amongst the world’s largest chicken quick-service restaurants globally. Restaurant Brands is in a good position to benefit from an expanding market of its iconic brands.

Over the last 45 years, Restaurant Brands’ has established itself as a leader in great food taste and quality. It ensures strict quality controls and procurement norms to maintain its quality standards. The company continues developing new products, focusing on customer feedback, in order to strengthen its leadership position in the quick-service food industry. Restaurant Brands has thus developed healthy relationships with its suppliers and distributors. For example, four distributors serviced ~87% of BK restaurants in the U.S. and five distributors serviced ~85% of PLK restaurants in the U.S.

Restaurant Brands’ franchise agreements are typically a 10-year or 20-year plus renewal period contracts. It also has long-term beverage supply arrangements with major beverage vendors for its TH and PLK brands in the U.S. and Canada. For example, Burger King Corporation has contracts with The Coca-Cola Company and Dr. Pepper/ Snapple, Inc. The company is targeting an overall international development of all of its brands through the establishment of master franchises with exclusive development rights and joint ventures with new and existing franchisees.

Dividends

Restaurant Brands last raised its dividend payout by 11%. It sports a decent dividend yield of 2.8% but has a very high payout ratio.

Strong free cash flow generation from three iconic brands offer a long runway for expansion. Restaurant Brands has increased the number of its restaurants to over 26,000 today from just over 12,000 in 2010. A strong growth in system-wide sales, superior cash flow, and balanced capital allocation pave a strong path for shareholder value creation.

Restaurant Brands has a target to build 40,000 restaurants in the near future. The company has been expanding its geographical footprint worldwide and has successfully established 60% of the new restaurants in leading international developing economies like India, China, etc. These countries are witnessing huge growth in consumerism and Restaurant Brands is in a good position to benefit from this rising trend. Strong focus on guest experience including technology like delivery, kiosks and outdoor digital menu boards should also support future revenue growth. The company is also growing through strategic acquisitions with $14 billion worth of accretive acquisitions completed since 2014.

QSR - Restaurant Growth
Source: QSR Investor Presentation

Competition

With very few barriers to entry, the restaurant industry is highly competitive. Restaurant Brands’ competes with many foodservice companies as well as local operators in the U.S., Canada and internationally. The company also faces competition from casual restaurant chains, convenience and grocery stores, and other food delivery services providers.

Bottom Line

Restaurant Brands is one of the most efficient franchised quick-service restaurant operators in the world with three leading independent brands having huge potential for future growth. The company is favorably placed from the growing chicken, coffee and bakery market which is expected to reach a $590 billion market size by 2023. International joint ventures, the popularity of its iconic brands and a strong global reputation for quality food positions Restaurant Brands well for future dividend hikes.

With that said, QSR is a pass for me. I am not interested in investing in the businesses it holds. It’s a tough business to be in and requires the business to continuously reinvent themselves to stay relevant with consumers. I like to look for business with a subscription like business model. I have to say that in that space I would prefer Starbucks. Another factor for my lack of interest is the minimal dividend growth.

If you own it, you must be happy with the result. As a recent dividend payer, the dividend growth is great but it’s not clear if it can keep it up. The big question is if it’s priced for perfection.

QSR vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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