Printed on April 1st, 2023 by Nikolaos Sismanis

A&W Income Royalties Earnings Fund (AWRRF) has two interesting funding traits:

#1: It’s a high-yield inventory primarily based on its 5.3% dividend yield.
Associated: Listing of 5%+ yielding shares.
#2: It pays dividends month-to-month as an alternative of quarterly.
Associated: Listing of month-to-month dividend shares

You possibly can obtain our full Excel spreadsheet of all month-to-month dividend shares (together with metrics that matter, like dividend yield and payout ratio) by clicking on the hyperlink beneath:

 

The mixture of a excessive dividend yield and a month-to-month dividend render A&W Income Royalties Earnings Fund interesting to income-oriented traders.

However there’s extra to the corporate than simply these elements. Preserve studying this text to study extra about A&W Income Royalties Earnings Fund.

Enterprise Overview

A&W Income Royalties Earnings Fund is a limited-purpose belief that owns the A&W emblems used within the A&W fast service restaurant enterprise in Canada. The emblems comprise a few of the best-known model names within the Canadian meals service trade. Particularly, the belief’s highly effective lineup of nice meals and drinks and established manufacturers embody A&W Root Beer, The Burger Household, and Chubby Hen.

The belief licenses these emblems to A&W Meals Companies of Canada. In alternate, these eating places enter a royalty pool and are required to pay a royalty of three% of their gross sales.

The A&W Income Royalties Earnings Fund stands out as a “top-line” fund, as its income is solely derived from the gross sales of A&W eating places, with solely minimal working bills, curiosity on Commerce Marks’ time period debt, and revenue taxes subtracted to get to web revenue.

This distinctive construction shields the Fund from the fluctuating earnings and bills related to really operating the eating places. Because of this, the Fund enjoys safety from inflation and a reliable stream of earnings, amongst different advantages.

Development Prospects

Just like different royalty trusts of its kind that we’ve got analyzed, like Boston Pizza Royalty Earnings Fund, the belief’s development prospects and general efficiency hinge on simply two key elements. The primary is the variety of franchised eating places in its royalty pool, whereas the second is the speed of development in same-restaurant gross sales.

Since its inception in 2002, the variety of franchised eating places within the belief’s royalty pool has elevated each single 12 months. This is a wonderful indicator of the belief’s success, because it suggests that there’s a excessive demand amongst franchisees for A&W’s manufacturers, indicating that the eating places are probably performing exceptionally nicely.

The underlying success of A&W’s manufacturers can also be mirrored in the truth that over 70% of recent A&W eating places opened over the previous three years have been opened by current A&W franchisees, whereas greater than 600 A&W eating places are owned by franchisees who personal at the least 5 eating places. In 2022, the variety of eating places within the Royalty Pool rose by 21 places to $1,015.

Supply: Investor Presentation

Supply: Investor Presentation

The mixture of a quickly rising variety of eating places together with progressively increased same-store gross sales has resulted in outstanding product sales development within the belief’s royalty pool. Though product sales briefly declined in 2022 because of the pandemic, new restaurant openings and rebounding same-store gross sales resulted in document royalty-eligible product sales of C$1.74 billion in 2022.

Supply: Investor Presentation

The above bar chart successfully showcases the belief’s recession-resistant royalty mannequin, as inexpensive fast-food chains like A&W sometimes expertise resilient gross sales throughout market downturns. Because of this, the belief’s royalty-eligible product sales continued to develop throughout the Nice Monetary Disaster.

The belief’s decoupling from every restaurant’s particular person working bills can also be obvious within the regular development of its product sales, which is the only issue that determines the belief’s royalty income.

Trying forward, we anticipate that the belief’s development potential will stay sturdy, given the sustained curiosity amongst franchisees in opening new A&W eating places and the natural development in same-store gross sales at A&W-licensed places over time.

Dividend Evaluation

In step with the belief’s goal of distributing all of its earnings to unitholders, its payout ratio has persistently remained close to 100%. As demonstrated earlier by the upward pattern within the firm’s royalty-eligible product sales, the belief’s distributions have additionally elevated over time. Administration might barely alter the payout ratio to make sure a extra predictable month-to-month revenue for unitholders, smoothing out the speed of month-to-month distributions over time.

In 2022, the belief’s payout ratio was 96.6%, paying out a document C$1.875 in distributions per unit out of the C$1.941 in distributable money per unit.

Supply: Investor Presentation

Traders mustn’t anticipate distribution will increase or distribution “cuts” however as an alternative anticipate that every 12 months’s complete distributions per unit will differ primarily based on the underlying product sales of A&W-licensed eating places.

That mentioned, we imagine that over time, the belief will proceed to pay out bigger distributions, following our aforementioned rationale relating to strong franchise curiosity and better same-store gross sales.

The present month-to-month distribution of C$0.16 interprets to an annualized price of C$1.92 (or $1.42), implying a yield of 5.3%. It is probably not an infinite yield, however the dividend’s potential for development is critical and provides to its general attraction.

Closing Ideas

A&W Income Royalties Earnings Fund’s funding case is fairly compelling. Its frictionless income mannequin and objective of distributing the whole thing of its earnings, together with the extremely engaging frequency of its month-to-month payouts, make it a extremely attractive choose for income-oriented traders.

The belief’s yield of 5.3% is particularly engaging, and it’s anticipated to develop in keeping with the established pattern of elevated franchised places and same-store gross sales development. Whereas excessive occasions just like the COVID-19 pandemic might briefly impression distributions, we’re assured that they are going to proceed to rise over time. Regardless of the pandemic’s strict lockdowns in 2020 and 2021, the belief’s earnings and distributions hit document ranges in 2022, highlighting the resilience of its manufacturers and royalty mannequin.