No, A&W Isn't a Bond Proxy

Let’s start off this week’s edition on A&W Revenue Royalty Trust (TSX:AW.UN), which has long been one of my favourite stocks.

A&W checks off all the boxes. With 1,000+ restaurants in Canada, a demonstrated history of excellent marketing and product innovation, a well-established brand, and almost 20 years as a publicly traded company with consistent dividend growth, it’s exactly what I like to put my money in.

2022 hasn’t been a great year for the stock. Shares have sold off on higher interest rate fears. The inevitable recession isn’t great news for a restaurants, either. These factors have combined to send shares approximately 15% lower thus far in 2022, although that has been offset somewhat by the distribution.

I remain bullish over the long-term. A&W has had excellent results passing through price increases thus far in 2022. Q3 results are due out later in October, but Q2 saw the company report double-digit same store sale increases. I expect similar numbers for the rest of the year. A&W also recently acquired the master franchise rights for Pret a Manger in Canada, which is a UK-based coffee chain with over 400 locations. The company will focus on putting Pret kiosks in existing A&W locations for now, but could easily build out standalone Pret locations in the future.

In short, I expect A&W to continue increasing same-store sales by 8-10% annually over the short-term, aided by higher inflation. Longer-term same-store sales should increase in the 5-7% range, leading to an annual distribution increase in the same neighbourhood going forward.

And, most importantly, this opportunity comes at an attractive valuation. The trust should earn a little more than $2 per unit in distributable cash flow. Shares trade hands today at approximately $34 each. That gives us a 17x P/E ratio for a company with multiple growth avenues. That seems pretty reasonable to me.

It should also squash all myths that A&W is nothing but a bond proxy. A&W offers inflation protection and growth from both increasing same-store sales and the addition of new restaurants to the royalty pool. No bond I’ve ever met can offer that.

No, A&W is a dividend growth stock, plain and simple. And I think it’s a dividend growth stock that will announce yet another dividend increase by the end of the year. A 1-cent increase in the monthly dividend — that’s an increase from 15.5 cents to 16.5 cents — would turn the current 5.3% yield into something closer to 5.7%.

And in case y’all are wondering, here are the long-term results for A&W. Not bad at all.

Canada’s worst bank

There’s been a lot of negative chatter about Bank of Nova Scotia (TSX:BNS) on the ol’ Twitter lately, with one person (who I like and respect, btw) calling it Canada’s worst bank.

I certainly don’t think Scotiabank is Canada’s worst bank (Laurentian is clearly miles worse), but I’ll admit things haven’t been great lately for the nation’s third-largest financial. The company’s search for a chief executive to replace outgoing CEO Brian Porter was reportedly a bit of a joke. And a recent exposé about mortgage fraud on CBC’s Marketplace inevitably featured a crooked mortgage rep from Scotiabank.

Over the last 20+ years there was a no-brainer way to pick the big bank stock that’s going to outperform going forward. You just had to pick the one that lagged all the others over the prior 3-5 years.

Scotiabank has been that stock recently. But it’s been a terrible performer since 2015, proving either the strategy doesn’t work or Scotiabank is just so bad it individually broke it.

I’m still bullish, for a few reasons. There’s hope a new CEO can help right the ship. I like the company’s Latin American exposure, particularly Mexico. I’m bullish on Mexico in general, too. Besides, even the worst of Canada’s largest banks is still a pretty good business. I figure the worst-case scenario is 8-10% total return over the next 10-20 years. Best case is in the 12-15% total return range.

Not sure about y’all, but I like those odds. Plus I get a 6.3% dividend while I wait.

A few more words on my Canadian bank strategy. I currently own shares of all six major Canadian banks, plus a little Equitable. Collectively, they generate approximately 13% of my total portfolio income. Scotiabank alone, meanwhile, generates a little over 3% of my total portfolio income. It’s my largest bank holding and a top five holding overall, but I don’t have massive exposure to it.

That’s the strategy I like. Own all the banks with a slightly higher weighting to the one you like the most. That way you get the upside when the laggard outperforms, but you’re not screwed if takes a while to turn things around.

Fintwit macro talk

Does anyone else think macro talk is ruining #Fintwit on the ol’ Twitter?

I’ve long said the average stock analyst shouldn’t bother with trying to predict big swings in the economy. Even if such a prediction could pay off very handsomely.

Recent history is a great example. Nobody predicted massive stimulus packages in 2020 would lead to the inflationary world we see ourselves in today. Nobody.

Meanwhile, everybody thought massive stimulus packaged introduced after the 2008-09 crisis would lead to an inflationary world, your author included. I even researched ways to short U.S. government debt as a way to play what I viewed as a no-brainer trade. Luckily, I never pulled the trigger.

I also was 1000% sure (no, not a typo) Canada’s banks were going to collapse on the backs of overvalued houses and risky mortgages back in like 2013. I did short the banks, putting my money down on what ultimately was a losing trade. Housing didn’t decline in a meaningful way for another NINE YEARS, and even then it took about 17 rate hikes to impact markets like Toronto and Vancouver. Calgary and Edmonton, meanwhile, keep on chugging away.

The point is this. Twitter macro talk is useless because all everyone is doing is throwing crap against the wall to see what sticks. There’s no downside to being wrong since nobody will remember in a few weeks, never mind a year or two in the future. And in the meantime, pessimists always sound smarter than optimists. Especially during a bear market.

It’s a good trade-off for the person spouting off. It’s a terrible trade-off for the person listening. The democratization of finance is, overall, pretty great. Guys like me get access to hundreds of skilled analysts that would have languished in some back office somewhere just 20-30 years ago. But then these guys step out of their lane and start offering takes on something that offers absolutely zero value.

I’ve been wrong enough over the years to not spend much time speculating on macro. I focus on individual companies and do my best to ignore macro issues. I suggest y’all do the same.

 Disclosure: Author owns shares of A&W and Scotiabank