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Summary

  • THI recently reported solid 1st quarter earnings.
  • It offers a cheaper valuation than SBUX with similar dividend growth prospects.
  • THI offers higher dividend growth than well known dividend companies including KO, PG, MCD, and JNJ.

Introduction

Many investors who are seeking yield look at household names such as The Coca-Cola Company (NYSE:KO), Procter & Gamble (NYSE:PG), McDonald's (NYSE:MCD) and Johnson & Johnson (NYSE:JNJ). No denying it, these companies have been historically good performers and make great core positions in portfolios. After more than 50 years of dividend increases, these great companies have rewarded investors. I believe that Tim Hortons (NYSE:THI) is the type of company that has the ability to grow its dividend over the next 50 years. THI is currently trading just below its 10-year P/E average of 21.99, which makes it an intriguing investment opportunity for investors interested in dividend growth.

1st Quarter Results of 2014

THI, the coffee giant that started operations across Canada, has recently expanded into the United States. It is the largest publicly traded quick service restaurant chain in Canada. In their last earnings report, Canadian same store sales increased by 1.6% and system wide sales growth was 4.6%. During this time period, 23 stores opened across the nation. Furthermore, 11 stores opened in the U.S. during the most recent quarter, same store sales increased by 1.9%, and system wide growth rose 7.9%.

Tim Hortons vs. Starbucks (NASDAQ:SBUX)

Company

P/E

Yield (%)

Recent Dividend Increase (%)

3 Year Div Growth**

5 Year Div Growth**

# of Years of Consecutive Increases

THI

20.2

2.17

23.08

26

23.6

7

SBUX

*33.05

1.39

23.8

35.2

N/A

4

*Using EPS from 2013 (2.26) and current stock price

** Numbers taken from Dividend.com

Both companies seem committed to returning money to shareholders as shown by similar recent increases to their dividends and high dividend growth rates. With a higher current yield, THI offers investors higher cash flow, while still offering similar dividend growth. In addition, with more years of consecutive dividend increases, including during the recession of 08/09, I feel more comfortable investing in THI. Trading at a drastically lower multiple than SBUX with the same dividend growth prospects, THI offers better value. Furthermore, I feel more comfortable waiting until SBUX has another year of increasing dividends and becomes a dividend challenger (5-9 years of increases) before initiating a position in the company.

Tim Hortons' earnings per share growth is vital to increasing its dividends. In their last quarter, the company announced a dividend increase with a target payout ratio between 35-40% . Therefore, as EPS continues to grow, their dividend growth should rise accordingly. Over the past 7 years (the time over which THI has seen dividends grow), the company has nearly doubled their annual earnings. It experienced a breakout year in 2010 with steadily increasing earnings into the fall of 2011. Dividends per quarter have gone from $0.07 to $0.32 over that same time period. Growth may be relatively stagnant in Canada, but with opportunities available in the United States and the continuous expansion plans, THI is very likely to keep up their tremendous dividend growth.

THI vs. Dividend Legends

Company

P/E

Yield (%)

Recent Dividend Increase (%)

3 Year Div Growth**

5 Year Div Growth**

# of Years of Consecutive Increases

THI

20.2

2.17

23.08

26

23.6

7

MCD

18.24

3.22

5.19

11.3

13.9

38

PG

21.46

3.23

7

7.9

8.8

58

KO

21.48

3.02

8.93

8.4

8.1

52

JNJ

19.6

2.73

6.06

7.1

7.6

52

** Numbers taken from Dividend.com

THI stacks up nicely against these dividend giants that many dividend growth investors consider core stocks. The other stocks mentioned recently increased their dividend by less than 10%. These four companies have relatively stagnant growth and slowing dividend growth. Although THI has a lower yield, investors can purchase its stock with the confidence that its dividend will experience double-digit annual growth. Furthermore, with similar P/E multiples, THI offers investors a better opportunity because of its ability to grow. MCD, PG, JNJ, and KO are great companies, but THI offers investors higher dividend growth for the same price.

Conclusion

Canada's largest publicly traded quick service restaurant is continuing its expansion into the United States. The company has continued to reward shareholders by way of dividend increases and outperforms the dividend growth of well-known companies. It is cheaper than its major competitor SBUX, while it offers similar dividend growth opportunities. With a reasonable P/E ratio, and rising earnings and dividends, THI has the ability to be a buy and hold investment for investors seeking dividend growth.

Source: Tim Hortons: A Great Dividend Growth Opportunity