St. Patrick's Day Sale
Many Canadian investors are attracted to the plethora of high dividend stocks on the TSX that pay monthly distributions.
It’s easy to see why. Monthly dividends mesh really well with a household’s bills. Put together a whole portfolio of monthly payers and eventually you’ll have enough to cover all your expenses. This is the Holy Grail for many retirees. Thousands of Canadian investors without the benefit of a pension seek to create their own using dividend stocks.
There’s one particular monthly dividend payer that not only looks to be undervalued today, but it offers a mouth-watering 8.1% yield. Let’s take a closer look at this stock.
Boston Pizza
Boston Pizza Revenue Royalties (TSX:BPF.UN) owns the trademarks behind the successful Boston Pizza chain of restaurants, which boasts some 400 locations across Canada and more than $1 billion worth of sales. In exchange for letting the operating company use the intellectual property, the trust gets first dibs on a certain percentage of the royalties generated by franchisees.
This is an incredibly powerful business model — one that shouldn’t be discounted quickly. Franchisees take on the most risk; they’re forced to run a restaurant. That’s not an easy business. The operating company isn’t a walk in the park either. It has to police chain standards, help franchisees with assorted problems, come up with new items, advertise effectively, and a million other things. Meanwhile, an investment in the royalty company doesn’t have to worry about any of that. The trust gets paid right off top-line sales.
It’s little wonder why Canada’s restaurant stocks have become popular with investors.
The opportunity
Unfortunately, business has been a little tepid for Boston Pizza lately.
Same-store sales — a key metric of health for the restaurant business — have been flat of late and were up just 0.2% in the first three quarters of 2018. Overall sales did slightly better because the company added a few restaurants.
There are a few reasons for this weakness. The chain is still heavily concentrated in Western Canada, which means Alberta’s crummy economy is bringing down overall numbers. The company was also forced to pass on higher wage costs to customers when both Alberta and Ontario raised their minimum wages. Prices went up and volume went down.
These issues, plus an increase in taxes that also decreased distributable income, have caused shares to crater 21% in the last year. Shares are also trading at a very reasonable 11.9 times expected 2019 earnings, which looks to be a solid entry point. The time to buy is when things are a little weak, not when a company is firing on all cylinders.
Collect 8.1%
Boston Pizza has been a dividend machine since its 2002 IPO. It hasn’t missed one monthly payout in the last 17 years, even during the Great Recession.
It gets even better. The trust has actually raised its payout on a regular basis. It began life as a publicly traded company paying out $0.083 per share on a monthly basis. It consistently raised the distribution before being forced to cut it after income trusts were taxed on earnings in 2011.
Since 2011, Boston Pizza has resumed dividend growth, increasing the payout in 2013, 2015, and 2016. It has held the $0.115 per share monthly payout steady since.
Investors probably shouldn’t expect dividend growth in 2019, but they can expect the payout to be maintained at today’s generous levels. An 8.1% yield sure beats other comparable income sources like GICs or government bonds.
The bottom line
Boston Pizza Royalties is exactly the kind of stock a retiree should own. It not only offers a terrific payout, but it also allows investors to own a piece of the restaurant business without the headaches of running a physical location.
The stock hasn’t missed a payout since its 2002 IPO. This is exactly the kind of dividend stock you should tuck away in your portfolio and own for a very long time.
