A&W: Canadian Income Treat

12/09/2005 12:00 am EST

Focus:

Steve Sjuggerud

Founding Editor, DailyWealth

"You may remember A&W Root Beer burger joints from when you were a kid," notes Steve Sjuggerud in DailyWealth. "While we don't see many in the US, A&W is the 2nd largest burger chain in Canada." Here he bites into this Canadian royalty play.

"A&W Root Beer was formed in 1922 and by 1933, it had over 170 franchised outlets. These retailers relied on products provided by founder Roy Allen. So Roy decided to charge them a license fee to use the name on their storefront. His concept was that it would be nice to sit back and collect royalties while everyone else did all the work, paid all the bills, and took all the business risk. And he would sit back and collect a fee from them every year. The good news is, we can own this exact business and collect royalties on the A&W name by investing in A&W Revenue Royalties Income Fund (CA:AW.UN Toronto).

"A&W is a big business in Canada. The company has 630+ restaurants across the country. Almost all of these restaurants are owned and run by franchisees. When the customer sees the A&W name, they expect the best fast-food burger in Canada, as well as a certain quality of service. Because of the name, the franchisees are more than willing to pay their royalties to A&W. After all, how successful would their little hamburger business be without the name? It might be a success, but they couldn't know for sure - it would be a big risk.

"The royalties A&W collects are 3% of sales, per year. Since A&W's sales have grown almost every year for decades. Over the last 20 years, with the exception of 1991, sales for A&W restaurants have increased at over 8% a year. As a result, the 3% of sales royalty has grown steadily as well. It's important to understand that the royalty is based on a percentage of sales, not on profits. So even if a franchisee struggles profit-wise in a year, the top-line royalty still must be paid.

"In my opinion, Roy Allen’s ‘perfect business’ is now the perfect investment. A&W has been adding roughly 4% more stores a year, and they've seen roughly 4% a year in sales growth per restaurant. The fund's mandate is to pay out all royalties to shareholders of the A&W Revenue Royalties Income Fund Right now, the fund is priced extremely attractively, with the dividend yield at over 8% a year. The fund has paid out a dividend of 9 cents a month (in Canadian dollars) since its inception in 2002. Even better, that dividend could (and should) be raised, sometime soon."

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