Bill Ackman’s Pershing Square Capital Management has held Restaurant Brands International (QSR) for nearly 12 years, making it a significant long-term holding. QSR’s capital-light, franchised business model generates substantial royalty fees from brands like Burger King and Tim Hortons, enabling a robust dividend yielding 3.49%.
Despite a recent 2% dip after strong Q2 earnings, driven by a Burger King turnaround and international growth, the stock remains an attractive buy with a forward P/E of 13 and analyst price targets suggesting a 15% upside, complemented by its consistent dividend.
Pershing Square Capital Management, the renowned hedge fund led by founder Bill Ackman, maintains a highly selective approach to its investment portfolio.
Unlike many other hedge funds, Ackman's Pershing Square typically holds a concentrated portfolio, with their latest first-quarter 13F filing revealing investments in just around a dozen companies.
Among these select holdings is Restaurant Brands International (QSR), a stock Ackman has favored for nearly 12 years. QSR is a global powerhouse in the quick-service and fast-food sector, boasting iconic brands such as Burger King, Tim Hortons, Popeyes, and Firehouse Subs.
While it might appear an anomaly amidst a tech-heavy portfolio featuring giants like Amazon, Microsoft, Alphabet, and Meta Platforms, Restaurant Brands International possesses distinct attributes that resonate with Ackman's investment philosophy.
As Ackman articulated in his annual letter to shareholders, "QSR's franchised business model is a high-quality, capital-light, growing annuity that generates high-margin brand royalty fees from its four leading brands: Tim Hortons, Burger King, Popeyes, and Firehouse Subs."
A Steady Stream of Dividend Income
Ackman's description of QSR as a "capital-light growing annuity" highlights its business model: consistent, reliable returns with minimal operational overhead. The majority of its revenue is derived from royalty and franchise fees, rather than direct ownership of physical restaurant assets. This structure also underpins its attractive dividend, which delivers substantial annual income to investors like Ackman.
Restaurant Brands International boasts an impressive dividend of $0.65 per share, a payout that has consistently increased for 10 consecutive years. With a yield of 3.49%, it significantly outperforms the S&P 500's average dividend yield by three times.
As of the first quarter's close, Ackman held 22.6 million shares of QSR, solidifying its position as Pershing Square's fifth-largest holding and representing approximately 14% of the fund's total portfolio.
With his substantial holding of 22.6 million shares, QSR's quarterly dividend of $0.65 translates into approximately $17.7 million in quarterly income for Ackman, summing up to roughly $58.8 million annually. This significant, consistent payout underscores Ackman's appreciation for the stock, especially in a current market characterized by volatility.
Burger King's Turnaround Gains Momentum
Restaurant Brands International delivered a strong second-quarter earnings report on August 6th, surpassing both revenue and earnings estimates. Despite this positive performance, QSR's stock experienced a modest dip of approximately 2%.
During the quarter, the company reported robust growth, with systemwide sales up 6.4% and comparable sales increasing by 3.8%. Revenue climbed 5% to $2.5 billion, while adjusted earnings impressively surged 14% to $1.07 per share.
Notably, Burger King's turnaround demonstrated tangible progress, with the burger giant achieving an 8.6% increase in comparable store sales and a 13% rise in operating income.
However, these gains were partially counterbalanced by a 5.2% decline in comparable sales and a 5.4% drop in operating income for Popeyes. Furthermore, Tim Hortons, despite being the company's most profitable segment, registered a minimal 0.1% increase in comparable sales and a 3.2% rise in operating income.
The varied performance across its brand portfolio, coupled with the company's decision to reaffirm rather than raise its full-year guidance despite Burger King's rapid improvement, may have contributed to investor caution.
Why Restaurant Brands International (QSR) is an Attractive Opportunity This August
The recent 2% stock dip presents an opportune moment for investors to consider Restaurant Brands International, primarily driven by its robust dividend. Moreover, Burger King's ongoing turnaround appears to be solidifying, and the company continues to experience significant growth in its international operations.
International revenue saw a strong 9.8% growth in the quarter, outperforming all other segments, with international operating income climbing an impressive 13.2% – mirroring Burger King's domestic surge. This made the international segment the second-most profitable, generating $194 million in adjusted operating income, closely following Tim Hortons' $287 million.
Furthermore, QSR appears to offer good value, trading at a forward price-to-earnings (P/E) ratio of 13 based on future earnings expectations.
Wall Street analysts project a potential 15% upside for the stock over the next 12 months, with a median price target of $85 per share. This anticipated capital appreciation, combined with its attractive dividend, positions QSR as a compelling investment.
