Royalty trusts were invented by stock market gurus for investors seeking a relatively safe vehicle that yields cash returns to offset historically low interest rates on savings.
Investors have jumped at the opportunity to earn better returns than the paltry interest offered on safe, stable savings accounts.
Four years ago in March, Bizworld reviewed two restaurant royalty trusts that had offered investors better than average payouts of cash and substantial capital gains.
In cash distributions and the price gains, both trusts had exceeded the general stock market.
The trusts — A&W Royalty Trust and Boston Pizza Royalty Trust — had performed well.
A&W royalty trust price at $26.94 had returned 183 per cent since 2002. Plus the $15.61 cents in distributions added another 173 per cent.
Boston Pizza unit holders experienced 112 per cent price gain from 2003 to 2012 with distributions of $15.22 cents adding another 148 per cent.
Boston Pizza profits haven’t baked any gourmet returns since 2014, reaching a high of $22.84 in 2017, settling at a recent $13.51.
The recent price is about 30 per cent higher than in 2003.
Unit holder distributions since 2015 have added $8.08 for a 21 per cent return.
Boston Pizza Royalty’s price in the last few years reflects several circumstances, from hitting a ceiling on the number of new stores, suffering regional economies, and higher wages in key regions.
Sharply higher minimum wages in Ontario and Alberta ate into profit margins. The sluggish energy economy in Alberta where BP has 113 of 397 stores cut into profits like a hot knife in butter.
Rapid growth over the years from a regional western chain to a national enterprise limits new stores to population growth. Previously, growth came from tapping new markets.
BP has expanded into the United States. Unfortunately for unit holders the U.S. stores are not part of the royalty trust. This further limits expansion.
The trust is paying out $1.38 a unit, but only earned $1.20 in the last 12 months, scaring unit holders with the prospect of a burning cut in distributions.
Competition is stiff, mirrored by Moose Jaw. BP’s lone outlet had only Bonanza as stiff competition until Original Joe’s, now closed, Brown’s Social House, Rock Creek, Montana’s, Canadian Brew House and another BP, opened.
The current 10.3 per cent yield is too juicy, representing a red flag to investors.
A&W has fared somewhat better with a price gain since March 2015 of 42 per cent and another 39 per cent in $9.18 of distributions.
The difference: A&W developed a slick marketing campaign appealing to the health-conscious perceptions of new and existing customers.
The no antibiotics, no hormones in its beef and chicken, although a bit misleading, have been a hit. The campaign has driven continuous growth in the benchmark same store sales and profits.
The Beyond Meat plant-based, highly processed burger has kept A&W on the growth trend.
Investors might consider the future with scepticism. Will A&W be able to continue this pace now that most competitors have adopted plant-based protein burgers?
A&W at a recent $33.87 pays out $1.90 a year for a yield just under five per cent. But it earned only $1.80 in the last 12 months, placing it in the questionable column for investors — except for 44 new restaurants
With 970 stores, A&W’s expansion potential is also limited.
Ron Walter can be reached at ronjoy@sasktel.net
The views and opinions expressed in this article are those of the author, and do not necessarily reflect the position of this publication.
