1 Canadian Restaurant Stock to Buy Today and 1 to Avoid

Restaurant stocks have been sold off lately as a number of headwinds affect the sector. This has created a solid buying opportunity for the quality companies that are now trading undervalued.

| More on:

A lot of restaurant stocks were sold off throughout last year, as the industry deals with a lack of growth in sales. So, how do you know which stocks will be fine and which you need to avoid?

With restaurant stocks, there are specific metrics you’ll want to watch that will tell you the health of the business and help to forecast the direction of the stock.

With every restaurant stock, one of the most important metrics of gauging the success of the business is same-store sales growth (SSSG). SSSG is especially important with companies that are growing their restaurant numbers, because the total overall revenue is going to be increasing as more restaurants are added, even if revenue at the existing restaurants is falling slightly. By analyzing SSSG, you can see how well a company is doing and if it continues to grow its popularity with consumers, or if it’s slowly losing it for one reason or another.

Two restaurant companies to analyze today are Boston Pizza Royalties Income Fund (TSX:BPF.UN) and A&W Revenue Royalties Income Fund (TSX:AW.UN).

Boston Pizza

Boston Pizza has long been the number one casual dining restaurant brand for Canadians, but as sales begin to slip, can Boston Pizza keep its dominant industry position?

Boston Pizza Royalties Income Fund receives a royalty on all system sales from the Boston Pizza restaurants, excluding sales of alcohol. Because it receives a royalty on sales, this makes the SSSG metric even more important for gauging the health of the business. In the first three quarters of 2019, SSSG was negative in each of the quarters, with the third quarter being the worst at -4.2%. On an annual basis, up until the end of the third quarter, SSSG was down 2.3%.

The decrease in same-store sales led to a decrease in system-wide sales, which meant there was a decrease in revenue the fund received as a royalty.

And because the fund aims to pay out 100% of its earnings, and its earnings declined from the same levels the year prior, Boston Pizza’s payout ratio has been creeping up higher and, as of the end of September, was 103.7%.

If something isn’t done soon to increase sales, the dividend will inevitably have to be cut. That’s easier said than done, however, and the market is clearly expecting the worst, as the stock’s dividend now yields more than 9.5%.

It’s possible Boston Pizza could still turn it around, and investors who buy today will be rewarded largely, but if you want a lower-risk a stock, I’d stay away from Boston Pizza and consider buying A&W.

A&W

A&W is a royalty company, just like Boston Pizza, deriving its income from a royalty on the sales coming from the more than 950 restaurants in its revenue pool across the country. Unlike Boston Pizza and a number of other restaurant companies, A&W is still seeing positive SSSG, reflecting the company’s strong brand and image in Canada.

The sales up until the end of the third quarter in 2019 hadn’t grown as fast as they did in 2018, when the SSSG was a whopping 9.8%, but the growth was still strong so far at 6.9%.

The strong growth in sales is a direct result of the company’s strong marketing campaign and high-quality food offerings resonating with consumers, and goes to show why it had the second most sales of any burger chain in Canada in 2018.

The continuous growth in revenue allows it to keep growing its dividend annually, putting it on the prestigious Canadian Dividend Aristocrats list, and making it an even more attractive investment.

You can buy this dividend-growth stock with a yield of nearly 5% today.

Bottom line

Although A&W’s 5% dividend may not be as attractive as Boston Pizza’s 9.5% dividend today, because it’s growing the dividend rapidly, in just a few short years, the tables could easily be turned.

Since A&W is continuously increasing the yield and Boston Pizza looks to be on the verge of a cut, it’s likely that an investment in A&W today will yield more in just a few short years, despite it being so much lower today.

This goes to show why dividend-growth stocks can often be better investments than high-yield dividend stocks.

Should you invest $1,000 in Ballard Power Systems right now?

Before you buy stock in Ballard Power Systems, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Ballard Power Systems wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

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 Daniel Da Costa has no position in any of the stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

hand stacks coins
Dividend Stocks

I’d Put $7,000 in These Legendary Dividend Growers to Earn for the Next Decade

If you've got some cash for your TFSA, here are two stocks that should give you growing dividend income and…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Here’s How to Catch up to the Average Canadian TFSA at Age 45

The TFSA can create immense passive income, and this dividend stock is an excellent choice.

Read more »

edit Safe pig, protect money
Dividend Stocks

How I’d Secure My Retirement With a $7,000 Investment Today

If you have the discipline to invest with a long-term strategy, here’s how you can use $7,000 in a TFSA…

Read more »

Canadian flag
Dividend Stocks

TFSA: 3 Canadian Stocks to Buy and Hold for Life

The TFSA is the perfect place to create income for years, and these three are the best Canadian stocks to…

Read more »

dividends grow over time
Dividend Stocks

Where to Invest $9,000 in the TSX Today

These stocks pay attractive dividends that should continue to grow.

Read more »

Canadian Red maple leaves seamless wallpaper pattern
Dividend Stocks

The Smartest Canadian Stock to Buy With Just $300 Right Away

If you've only got a bit to invest, then this is one of the best Canadian stocks to consider.

Read more »

ways to boost income
Dividend Stocks

How I’d Transform $7,000 Into a Lifetime of Passive Income

A $7,000 investment in these TSX stocks today could generate $120.54 in tax-free dividend income every quarter.

Read more »

A meter measures energy use.
Dividend Stocks

1 Magnificent Utility Stock Down 13% to Buy and Hold Forever

This top utility stock is an excellent buy on dips for investors to earn income and long-term price appreciation.

Read more »