Restaurant Brands International, the powerhouse behind popular fast-food chains like Burger King, Popeyes, and Tim Hortons, has gained approval for a share buyback program. This program allows the company to repurchase up to 10% of its outstanding shares, or a maximum of $500 million, over the next year. While this might seem like a simple move, it holds significant implications for both the company and its shareholders.
Share buybacks, a strategy where a company buys back its own shares from the open market, are often seen as a positive sign. They can boost earnings per share (EPS) by reducing the total number of shares outstanding. This means each remaining share represents a larger portion of the company’s overall value. However, the real value of this program lies in its potential to protect shareholders from significant stock price drops. The company is most likely to utilize the buyback program when its share price experiences a significant decline. In fact, they started buying back shares in October 2023 when the stock price had fallen by nearly 10% in just two weeks, demonstrating their commitment to supporting the stock price during periods of volatility.
While the buyback program serves as a safety net, it’s important to acknowledge that Restaurant Brands is already in a strong position. The company operates in the consumer discretionary sector, where goods are considered non-essential. With anticipated interest rate cuts, this sector is poised for growth. The Federal Reserve is expected to lower interest rates, possibly by 50 basis points at its September meeting, and potentially by 120 basis points or more by December. This drop in interest rates could benefit Restaurant Brands as consumers are likely to have more disposable income after refinancing their home loans and lowering their monthly payments.
This positive outlook is further supported by RBC’s recent decision to raise its price target for Restaurant Brands to $95. The current share price of around $70 implies a potential upside of 36%, making it an attractive investment opportunity.
In comparison to its peers, Restaurant Brands shines brightly. Its forward-looking dividend yield of 3.3% stands significantly above most other U.S. and Canadian quick-service restaurant (QSR) stocks. Its forward price-to-earnings (P/E) ratio of 19.3x is below average compared to a peer group of nine U.S. and Canadian QSR firms with market capitalizations of at least $2 billion.
Moreover, Restaurant Brands has consistently outperformed its competitors in revenue growth. Its compound annual growth rate (CAGR) of over 10% over the past two years surpasses the 7% average for its peer group and is double that of McDonald’s, the industry giant. The company also boasts positive forecasts for EPS growth over the next two years, with a projected CAGR of 14%, exceeding the average of 11.5% for its peer group.
Restaurant Brands’ share buyback program, coupled with favorable market conditions and its impressive track record, makes it a compelling investment opportunity. The company’s ability to protect shareholders from significant price drops, its strong performance, and its position in a sector poised for growth contribute to its attractiveness. While the buyback program serves as a valuable safety net, investors should consider the company’s broader strengths and the potential for growth as they make their investment decisions.
