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.
The U.S. and Canadian stock markets have declined about 8% and 9%, respectively, from their 52-week highs. They’re spooked out from the Halloween month!
Let’s take a step back and be objective. The U.S. market is still about 29% higher than three years ago. The Canadian market? About 12% higher. From five years ago, the U.S. market is 52% higher and the Canadian market is 15% higher.
SPY data by YCharts. The 10-year price action of SPY and TSX:XIU
You get the big picture. The stock markets go up over the long term. Historically, it has always been money-making opportunities to buy quality companies on dips. And this dip is no different if you find great businesses to be attractively priced.
Here are some North American dividend-growth stocks that I find compelling today.
Undervalued Healthcare Stock
AbbVie (NYSE:ABBV) offers a safe 4.7%. Its payout ratio of less than 50% is sustainable.
Since AbbVie was spun off from Abbott Labs (NYSE:ABT) in 2013, it has increased its dividend every year thereafter. Its four-year dividend growth rate is 13.2%. Its trailing 12-month dividend per share is 40% higher than the previous 12 months.
The spooked market has brought AbbVie back into undervalued territory. At less than US$82 per share, it trades at a blended P/E of about 11. Analysts estimate the company will grow its earnings per share by at least 12% per year for the next three to five years. Read More