1 Battered Stock I’m Never Selling

Restaurant Brands International Inc. (TSX:QSR)(NYSE:QSR) problems at Tim Hortons are rolling over the rim. But here’s why I haven’t been selling and why I’ll buy more on weakness.

| More on:
The Motley Fool

Restaurant Brands International Inc. (TSX:QSR)(NYSE:QSR) recently fell into bear market territory (~21% peak-to-trough decline) despite solid Q4 2017 results and a very generous 114.3% dividend increase. The stock now has a massive 3.35% dividend yield that is far greater than that of many of its competitors, including Starbucks Corporation (NASDAQ:SBUX), which currently has a 2% yield.

A series of unfortunate events

The +20% decline is mainly attributed to a series of unfortunate developments that’s plagued the stock and has made some Tim Hortons’ regulars pass on their daily double-double. It seems like there’s no pleasing the Great White North Franchisee Association, which has threatened to take legal action regarding a countless number of issues from computer bugs to unfair supply price hikes.

To say the relationship between Restaurant Brands and its Canadian franchisees is toxic would be a vast understatement. Same-store sales growth initiatives for Canadian locations appear to have hit a roadblock amidst the spat, with the franchisee association resisting the parent company’s plans to split renovation costs in order to revitalize existing locations. Meanwhile, the media has been buzzing over the controversial denial of a licence renewal for a Toronto-based franchisee Mark Kuziora.

More recently, Ottawa announced its intention to probe franchisee claims that Restaurant Brands had breached conditions put forth by the federal government prior to the Tim Hortons’ acquisition in 2014. The office of Navdeep Bains, Minister of Innovation, Science and Economic Development, said that they’re “…analyzing the takeover documents to find evidence of wrongdoing.”

This must be concerning to shareholders; however, given the stock’s recent +20% decline, it appears that fears are blown way out of proportion. Even if the Tim Hortons’ brand has lost its lustre with some Canadians, the fact remains that “boycotts” typically don’t last over the long run.

Sure, the countless negative developments could be reason enough for an investor to sell the stock of Restaurant Brands; however, when looking at the stock’s undervaluation and its rapidly accelerating cash flow from the fundamentals, Restaurant Brands is an absolute steal! Worst-case scenario is if Restaurant Brands is found guilty of breaching the terms of its acquisition of Tim Hortons.

The sentiment is overly pessimistic

Moreover, even if every Canadian boycotted Tim Hortons for years to come, I still think the stock is a bargain, because while the buzz has been focused on Canadian Tim Hortons’ locations, the public is completely ignoring the global potential of the Tim Hortons’ brand. And let’s not forget that Burger King and Popeye’s Louisiana Kitchen are both absolute cash cows slated to return a profound amount of cash back into the pockets of its shareholders.

Sure, Tim Hortons is a company with firm Canadian roots; however, as an investor, one must check their emotions at the door and consider investment decisions objectively. The herd is running to the exits and locking in their losses over concerns that I believe are short term in nature. Spats between franchisees are nothing new, and embarrassing boycott-worthy events seldom have long-lasting effects to a company’s top-line.

Look at Starbucks and the protests over the arrest of two African-American men who simply wanted to use the washroom. It’s a PR nightmare that’s probably more boycott-worthy than most of Tim Hortons’ hiccups.

Starbucks management was quick to respond, however, with the shutdown of 8,000 stores for an afternoon of racial bias training. It’s this quick response that Restaurant Brands is lacking, allowing its stock to free-fall. In time, however, I do believe that Restaurant Brands will bounce back and that Tim Hortons will regain its lustre with Canadians with a new leader at the helm.

Newly appointed Tim Hortons’ President Alex Macedo definitely has some large wrinkles to iron out as the relationship with franchisees is at a low point, but I’m confident that the brand is not beyond repair as some believe.

With this in mind, I welcome any further declines to add to my position. Restaurant Brands is still an absolute cash cow with a high-growth ceiling and nothing about that has changed.

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 and Starbucks. David Gardner owns shares of Starbucks. Tom Gardner owns shares of Starbucks. The Motley Fool owns shares of RESTAURANT BRANDS INTERNATIONAL INC and Starbucks. Starbucks is a recommendation of Stock Advisor Canada. Starbucks is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

dividends can compound over time
Dividend Stocks

Want a 7% Yield? The 3 TSX Stocks to Buy Today

These TSX stocks are offering high yields of over 7%, making them attractive for investors seeking steady passive income.

Read more »

how to save money
Dividend Stocks

The Smartest Dividend Stocks to Buy With $200 Right Now

These smartest dividend stocks can consistently pay and increase their dividends in the coming years, irrespective of the macro uncertainty.

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

3 Utility Stocks That Are Smart Buys for Canadians in November

These utility stocks benefit from regulated businesses and generate predictable cash flows that support higher dividend payouts.

Read more »

Start line on the highway
Dividend Stocks

Invest $10,000 in This Dividend Stock for $600 in Passive Income

Do you want to generate passive income? Forget the rental unit! This option will save you the mortgage yet still…

Read more »

Senior uses a laptop computer
Dividend Stocks

1 Reliable Dividend Stock for the Ultimate Retirement Income Stream

TD Bank (TSX:TD) shares are way too cheap with way too swollen a yield for retirees to pass up right…

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

Is Brookfield Infrastructure Partners a Buy for its 4.75% Yield?

Brookfield Infrastructure Partners (BIP) has a 4.75% dividend yield. Is it worth it?

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Where to Invest Your $7,000 TFSA Contribution

The TFSA is attractive for investors who want to generate tax-free passive income.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA Investors: 3 Dividend Stocks Worth Holding Forever

These TSX stocks have the potential to grow their dividends over the next decade, making them top investments for TFSA…

Read more »