Pacific Trader: Is it time to take a bite of A&W?

For years A&W Revenue Royalties Income Fund was an income investor's dream. Then the pandemic happened, forcing the closure of restaurants and a suspension of payouts. Are we back to the good old days?

A&W Revenue Royalties Income Fund's gravy train comes from restaurants' sales, not profits

Credit: A&W Food Services of Canada

A&W Revenue Royalties Income Fund’s gravy train comes from restaurants’ sales, not profits

After choking on the pandemic, the fast-food income fund is now posting record sales

The stock: For years, A&W Revenue Royalties Income Fund (TSX:AW.UN) was an income investor’s dream. In a time of low interest rates and dividend yields, the stock’s relatively frothy monthly distributions went down like a sweet root beer. Then the pandemic happened, forcing the closure of restaurants and a suspension of payouts. With the post-COVID reopening, cash flow is up and distributions have resumed. Are we back to the good old days?

The drivers: In terms of revenue and income, the answer is yes. Sales at North Vancouver-based affiliate A&W Food Services of Canada have grown for seven straight quarters. For the first nine months of 2022, they were up 12 percent over the year-earlier period—safely clear of pre-pandemic levels. As a top-line royalty fund, AW earns a share of restaurant revenue in return for the chain’s use of the trademarks it owns. With negligible operating expenses, it’s shielded from the effects of inflation. That take at the till flows almost directly to shareholders.

The black cloud hovering over this rosy picture is the possibility of a Canadian recession. That would drag down discretionary expenditures on things like Teenburgers (although it might also attract a work crowd that previously lunched higher up the food chain). The whole royalty model may be under pressure should interest rates stay elevated, as income investors now have their pick of high-yielding alternatives. One wonders, too, when the Great Root Bear’s already large footprint—it’s Canada’s No. 2 burger franchisor with more than 1,000 outlets—reaches its saturation point. But with a distribution yield of 5.2 percent based on Tuesday’s close of $37.03, you’ll at least be paid well to wait until these questions get answered.

Word on the street: “With A&W’s continued growth lately, and with the stock price losing value, tracking the market throughout the last year, A&W stock is now trading at one of its lowest valuations in years,” The Motley Fool’s Daniel Da Costa wrote in January. The fund’s reduced payout ratio of 85 percent and growing cash position will help it weather a recession if it happens, he reasoned.

Coming & going: B2Gold Corp. (TSX:BTO) has reached agreement to buy another Vancouver-based exploration company, Sabina Gold and Silver Corp. (TSX:SBB) in an all-stock deal valued at $1.1 billion. Sabina’s main asset is a fully permitted string of properties in Nunavut.