“Retro burger dynamo soars next to McDonald’s with ‘50s flair and modern wi-fi.”

Sleuthing out the "Stable, quiet, prosperous" pick teased by Roger Conrad's Canadian Edge

By Travis Johnson, Stock Gumshoe, November 29, 2011

Roger Conrad has been a well known fan of relatively stodgy income stocks for a long time, with his Canadian Edge and Utility Forecaster both ranking among the top income-focused newsletters according to Stock Gumshoe reviewers for most of the past several years.

And today’s he’s teasing us with yet another somewhat unusual income investment, again North of the border, with the hopes that you’ll be excited enough about learning about this pick that you’ll sign up for Canadian Edge in order to get the name and ticker.

But of course, we like to do things a little bit differently over here at Stock Gumshoe — we like our stock ideas to be, shall we say, a bit more free-ish. So what clues does he give about his top-secret income pick?

“I’m not trying to sell you on McDonald’s.

“Without question, the Golden Arches has been a big, safe cash-maker for a long time.

“But there’s a far cheaper ‘blast from the past’ that can help you build this kind of wealth in a shorter period of time—and with much less risk.

“You won’t find it listed on Wall Street… yet a select group of investors has found a special way to profit from it enormously, some more than doubling their wealth in a few short years—safely and quietly.”

OK, so cheaper, faster growing than McDonald’s, retro-styled, and safe? That sounds pretty attractive, but let’s let Conrad paint a bit more of the picture for us …

“There’s no question that ‘retro’ has been a hot sell for some time now.

“Whether it’s movies, music, food, fashion or art, anything that breathes new life into the best of pop culture’s past seems destined to be a sure-fire hit.

“One company has taken this approach to the max and, by doing so, grown leaps and bounds at a time when many chains are closing shop faster than a hot rod in a drag race.

“With its sleek, mid-century design, vintage artwork and non-stop hit parade of classic tunes, this restaurant chain lures customers back to an era when the burger was truly king.

“Imagine soda machines right out of It’s a Wonderful Life… ice-cream floats in frosty mugs chilled just for you—a signature drink so popular here it’s sold in numerous grocery and convenience stores around the country.

“No doubt about it, this burger chain takes retro seriously—so seriously it even holds ‘cruise nights’ all summer long where classic- and antique-car owners can show off their vintage treasures.”

We get a few more clues about this fabulous burger chain, too …

“… sales have doubled in the last decade, placing it right behind McDonald’s as the second-largest burger chain in this North American market.

“In fact, it’s such a hit that it has already opened over 80 new locations in just the last four years… and now has paid deposits for well over 100 new franchises.

“And it’s so well-run that it has won top honors as part of Canada’s 50 Best Managed Companies program six years in a row.

“Now, while all of this would be more than enough to enrich anyone with a stake in this company, the only problem is that it is still private.”

Private? Aha, so there’s a bit of a catch — it’s not that Conrad is teasing us to buy the stock of this company, it’s something a little different … here’s how he describes it:

“there’s a special type of fund that allows them to ‘own’ this company’s trademark—which is licensed to restaurants in exchange for a percent of their huge sales take.

“With over 700 restaurants already using its trademark, this means a lot of income coming in through the door—so much income that this little-known ‘trademark’ fund has seen quarterly revenue growth soar 183% over the past year… and now has operating and profit margins near 100%!”

Well, I should hope the operating and profit margins would be up around 100% — it’s not all that expensive, after all, to tally up the sales, ask for the cash, and write a check to your shareholders when it comes in.

In case you’re wondering, yes, this sounds like some kind of pass-through entity, an income trust or a MLP — and since the Income Funds in Canada (also called Canadian Royalty Trusts, or CanRoys) have mostly gone the way of the dodo, it’s apparently some kind of publicly traded partnership.

“The thing is, this fund belongs to a special class of equities, hailing from a land very much like us in the 1950s: stable… quiet… prosperous.

“This royalty income fund is organized as a limited partnership and hands over the lion’s share of all profits to its investors—meaning you.

“Think of it this way: If you parked $10,000 into a reliable dividend payer like McDonald’s three years ago, you’d now have at least $1,160 in extra income.

“Not bad, right?

“Yet if you did the exact same with the ‘trademark’ fund mentioned above, you could be sitting on up to $4,400 in income.”

So which trust is Conrad teasing now?

Thinkolator sez: this is A&W Revenue Royalties Income Fund (AW-UN or AW.UN in Toronto, AWRRF on the pink sheets)

And yes, this is a relatively easy and stable way to get a piece of the top line revenues from the A&W burger chain in Canada — the corporate structure is slightly complicated with partnership interests going back and forth, but they explain it pretty well here. Essentially, this income fund owns the trademarks of A&W in Canada, and they license those trademarks to the company that owns, franchises and operates the actual restaurants. In return, the fund gets a 3% top-line royalty on all sales at all those restaurants.

And yes, the margins are very high — they have a minor amount of office expense, but most of the cost is taxes and interest expense, so most of that royalty goes to the bottom line and is paid out to shareholders/unitholders as a dividend/distribution.

Currently, the yield is in the neighborhood of 7% — they set the royalty payment each year and apparently don’t adjust it during the year, and they appear to place a premium on keeping the distribution stable (as evidenced by the effort they made to keep up the distribution despite the big cost increase from taxes this year). The distribution is paid monthly, FYI, at 11.7 cents per unit (Canadian).

You can get a brief picture of their financial health from the latest quarterly report press release here — their distributable cash is down slightly from last year, which appears to be largely due to the fact that they had to start paying taxes at 18% in 2011 after the pass-through trust structure was killed by Ottawa. That was offset somewhat by the fact that they borrowed a bit of money to buy back shares, so they kept the per-share distribution similar to last year’s.

It’s an interesting income play, and it seems likely that if we see inflation in both the US and Canada and the Canadian dollar remains relatively strong, the revenue ought to rise slowly as sales rise with inflation. I don’t know of any reason to expect A&W to suddenly become more popular or substantially boost prices, though it’s certainly a plus that this revenue-based top-line cut means you don’t have to worry about input costs — an overall plus, inflation-wise, since you’d get the benefit of rising product prices without the pain of rising input costs (assuming, of course, that rising prices don’t deter the consumers from buying).

I’m afraid I’ve never been to an A&W in Canada and have no idea how popular they are or whether they’re rising or declining — they have increased the number of stores, which must be a good thing, though the income trust doesn’t get those increases for free (they effectively pay the operator for the royalties from new stores by issuing new shares of the fund to the operator, as far as I can understand it … the real key is same store sales growth for them in terms of per-unit cash flow and potential dividends). They have no claim to the A&W name or trademarks elsewhere, so this is really not a big growth story — probably not surprising, since it’s pitched as a safe income play.

So what do you think? Is Conrad’s 7% yielding hamburger trademark income trust the kind of thing you’re interested in? Or would you prefer one of the big operators like McDonald’s or Yum Brands or someone else that has dividend growth but a far lower current yield? The only fast food chain I own shares of pays no dividend at all, I’m afraid, so it takes all kinds … let us know what you think with a comment below.

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19 Comments on "“Retro burger dynamo soars next to McDonald’s with ‘50s flair and modern wi-fi.”"

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dennis
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dennis
November 29, 2011 5:20 pm

Be very carefull when buying A&W . I have owned the stock for two years. Bought at $22.51 than to raise more money they issued more shares and the bottom fell out of the price. Presently at $19.64 and thinly traded. Canadian Unit trusts seem to be famous for this tatic. The stock and price looks good and than wham they issue new shares and the stock price takes a beating

Scott
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Scott
November 29, 2011 6:26 pm
A&W does not issue new shares to raise money. In fact, they just bought up a ton of them in january to help keep the distribution stable. They do issue new shares as compensation for royalty payments as indicated in the article above, but the fund itself has no need to issue shares to raise money since it has virtually no operating expenses. Partly the bottom dropped out of the stock because it was overpriced. Partly it fell because the Canadian dollar dropped about 10% from it’s high so the exchange rate has temporarily killed the American price of the… Read more »
dennis
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dennis
November 29, 2011 10:38 pm

I can not follows your thinking. Fact is on March 2 2011 they issued 2.997.000 units at a price of $23.39 Canadian. todays price as stated before is now $19.64 Canadian. The ten percent difference in the dollar really does not figure into the equation, when you are only dealing in Canadian Dollars

Scott
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Scott
November 30, 2011 11:05 am
Quote from the press release that you cite: “There is no change in the total number of equivalent Units outstanding and no change in the amount of cash available to pay distributions as a result of the Offering. ” This is something that A&W does frequently as a result of their relationship between the various partnerships and trademark owners. It was not a capital raise, it was the parent company releasing some of the shares that have been acquired as a result of new stores coming online. The stock was overvalued earlier this year, no question. But there was no… Read more »
tozer
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tozer
November 29, 2011 5:27 pm

I fondly recall visiting their shops in the U.S. many years ago; being young, I don’t recall where. But I DO recall their on-tap root beer and home-style burgers were just swell!

john
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November 29, 2011 6:18 pm

It’s at 18.89 and I am sure there a lot other touting things tha are more interesting.. If you want div yield consider ANH 15% not bad..

Scott
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Scott
November 29, 2011 6:29 pm

While ANH is interesting, the leverage is unbelievably high compared to A&W. There’s no comparing the two.

rod
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November 29, 2011 6:37 pm

that is a nice income play, they are a poplar hamburger resturant much like a wendys or dairyqueen and yes they pop up new resturants all the time, they are now getting into smaller kiosk style in malls and theatres. might be a good play right now as food prices go up these kind of places pick up the pace in sales,thx, PS, they serve breakfast as well

SRK
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SRK
November 29, 2011 6:59 pm

Any news on this tease – Marin Katusa from Casey Research writes of:
-a Canada-based exploration and production co. (oil and gas)
-having concessions in Romania, and an acquired project in Alberta
-in partnership with Kuwait Energy Co., to bring unconventional oil and gas technology to
KEC’s properties
-price per share @ $1.00
Thanks for your time.

Mohd Razak khan
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Mohd Razak khan
November 29, 2011 7:34 pm

They were in Singapore quite some time back and I am not sure if they still operate here.But I’ll stick with MLP’s for dividend plays.

Brian
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Brian
November 29, 2011 8:29 pm

A&W are having quite a run, new resteraunts are opening all the time, the product is excellent, and well priced. The guy behind it all Jeff mooney is one smart guy. They have recently gone to national advertising with a very different campaign that is good and quite funny. Good yield, good company,

Menachem
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Menachem
November 30, 2011 6:05 am

What about taxes on the distributions for share or whatever holders?
With another Canadian stock I own, a large cut comes out of every dividend.

Ira Cotton
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Ira Cotton
November 30, 2011 1:02 pm

Canada withholds 15% on dividends of Canadian stocks to taxable accounts in the U.S. This withholding can be recovered as a credit or deduction when you file your U.S. federal income tax return.

Lorne Cutler
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Lorne Cutler
December 1, 2011 3:21 pm
30 years ago A&W was popular and then they disappeared. All of a sudden about 5 years ago, you started to see them again. They do seem to be going into more mall fast-food kiosks which is a good move considering you seldom see a Macdonalds, Harveys, A&W or Wendy’s at the mall. Agree with the comment above that to compare A&W to ANH is ridiculous. The risks are totally different. Should interest rates go up and ANH can’t borrow low and lend high anymore, they are screwed. A&W’s business model is completely different. If all risk was the same,… Read more »
Ron Williams
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Ron Williams
December 5, 2011 3:40 pm

…just want to let you know… I like their food, the quality is decent and so are the prices. My only complaint is there isn’t one close to my home… yet. I would eat there long before I ever stopped at a McDonald’s, Burger King, etc.. Now if they would only open a few more locations, I won’t spend $10 on gas to eat a$6 meal.

How that plays into the quality of investment, I don’t know. I guess we have to wait and see what they do.

Greg Olson
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Greg Olson
December 6, 2011 3:16 pm

I just read an article that said A&W may disappear in 2012. The reason is they are too small in size compared to a Wendy’s or McDonalds. There are only hundreds of restaurants compared to 1000s of the other. They cannot have economy of scale compared to the others. Don’t know if that is true, but the comments made me think.

Scott
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Scott
December 21, 2011 5:17 pm

Greg, the article that you read was most likely referring to the A&W stores here in the states which are owned by YUM brands, and not part of the pool of restaurants that are included in the revenue royalty trust that trades in Canada. A&W is the second largest fast food franchise in the country of Canada and will not be going away next year.

S
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December 6, 2011 4:24 pm
I used to own an A&W, had it for a few years. Many of the operators are selling and getting out of it. The reason for such a huge expansion as of recently is because current franchisees are expected to expand owning anywhere up to 5 restaurants. There was a push for them to open them a.s.a.p., I am sure that this is the surge you had mentioned. It is not easy to own one of these and profit to the franchisee is difficult as well. Yes the food is good, the marketing decent, the bottom line just isn’t there… Read more »
Jerry Wilson
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Jerry Wilson
January 16, 2012 11:06 pm
Got a point. There just aren’t enough of them to compete in that price range. Especially when you have a Burger King or a McDonalds going neck and neck every 4 or 5 miles or so. However their nostalgia theme isn’t a bad idea and their expansion theory is also sound since location and rennovation ( or lack of ) is a problem with many of the stores. Sonic and Five guys are getting their buzz from hyper media, new and different and/ or location. However had A&W moved into Sonics locations locally it would be a different story while… Read more »
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