Happy Halloween! Stocks can be beaten down by the market — sometimes it makes sense but other times it’s outright irrational! Which is a trick? Which is a treat?
Treat: A&W yields 5.1%
As the name suggests, A&W Revenue Royalties Income Fund (TSX:AW.UN) collects royalties. Specifically, it collects 3% of sales from the 973 A&W locations across Canada. In the trailing 12 months (TTM), it had CAD$0 of capital spending.
Yes, you read that right. A&W didn’t have to pay a cent to maintain its cash flow generation of CAD$34 million. It’s such a small company that many funds ignore A&W, which makes it all the merrier for retail investors like you and me.
A&W is a franchise. Qualified franchisees pay a minimum of CAD$250,000-350,000 to start their restaurants using A&W’s proven business model and having its support. A&W wants its franchisees to succeed because their success goes straight to A&W’s bottom line.
A&W’s recent weighted average interest rate was less than 3.6%, which suggests it’s a low risk investment. The company’s TTM free cash flow payout ratio was about 90%. So, income investors can trust its monthly cash distribution.
Moreover, A&W’s recent stock price decline of almost 20% from $46 to $37 is purely multiples compression from a high valuation to a decent valuation. And I believe it’s a Halloween treat to be able to accumulate the units at the current valuation.
Treat: Brookfield Property Partners yields 6.9%
I trust that Brookfield Property Partners L.P. (TSX:BPY.UN)(NASDAQ:BPY) or the economical equivalent Brookfield Property REIT (NASDAQ:BPR) is another treat, offering value, a high but safe yield, and massive growth potential.
The stock has underperformed for an extended period and is easily identified as the worst-performing Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) subsidiary.
In fact, BPY has only delivered total returns of about 3.3% per year since it became publicly listed in 2013. This means that the stock has a long way up in the future when the market realizes how valuable it is.
The stock may be depressed now due to its core portfolio (about 85% of the balance sheet) in retail and office properties. However, BPY owns quality assets, which have an overall high occupancy of greater than 90%. Also, more recently, it has been adding multifamily assets to its core portfolio, and it aims for a stabilized occupancy of 95%.
Retail is seen as dead by some people, but that’s simply not the case for BPY. In the first half of the year, the occupancy for its core retail portfolio was 95% while the same property growth was 0.1% (against 95.6% and 1.1% in the previous year).
Interestingly, its core office portfolio is doing worse. Its occupancy and the same property growth were 92.4% and -0.4%, respectively, (against 92.6% and 6.4% in the prior year.
Surely, BPY can do better in both asset types, but keeping the business stable is already a huge feat.
BPY is a global value investor. So, it can choose to invest in geographies and quality assets that are stressed for cash and sell mature assets (often after it has added value) to be redeployed into higher-return investments.
So far this year, it has realized US$2 billion of net proceeds from asset sales and invested more than US$1 billion in new developments and US$300 million in acquisitions.
BPY offers a 6.9% yield. The TTM payout ratio was 91% of cash flow, or more accurately, 67% when asset sales were accounted for.
Trick: Cineplex yields 7.9%
Lately, I began to think that Cineplex (TSX:CGX) could be a trick, in other words, a value trap. It has high debt levels, which leads to high borrowing costs; its recent weighted average interest rate was greater than 6.5%! It’s using way more debt than equity to fund business growth. The debt-to-equity ratio was 3.9 times in the most recent quarter.
No wonder the stock offers a whopping dividend yield of 7.9%! Brave investors demand a high yield for the higher risk they are required to take.
The entertainment and media company’s earnings and, more importantly, free cash flow have both been erratic. So, investors shouldn’t trust its TTM free cash flow of CAD$132 million too much because the free cash flow of the next 12 months could be way lower.
Actually, in the TTM, Cineplex generated operating cash flow of CAD$253 million. After subtracting capital spending of CAD$121 million and repaying debt of CAD$173 million, there was nothing left to pay the dividends.
It’s understandable why Cineplex’s debt is high. It has been borrowing to diversify the company away from its theatre business with efforts such as The Rec Room, Topgolf, and Playdium. However, the bulk of its revenues (about 70%) still comes from box office or related food and services revenue. So, attracting moviegoers is still key for stable revenues and earnings.
To sum it up, Cineplex still relies heavily on a good movie slate. Its other efforts are contributing to growth, but we have yet to see the actual same-store sales growth from, say, The Rec Room, versus the growth that’s contributed by adding new locations. Currently, there are seven locations and one that’s scheduled to open in Montreal in 2022.
Halloween is treating income investors to a feast of quality businesses like A&W and Brookfield Property for juicy passive income with yields of 5.1% and 6.9%, respectively. However, don’t get tricked into buying high-risk businesses like Cineplex — even though it can deliver incredible returns with a 12-month target that’s almost 35% higher — unless you’re using play money for a gamble.
If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.Disclosure: As of writing, we’re long AW.UN, BAM.A, and BPY.UN.
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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