February 13, 2020 – before the opening of trade

Boston Pizza Royalties units have announced Q4 results along with the feared and not surprising cut to the distribution. They are cutting by 11.3% from 11.5 cents per month to 10.2 cents.

This would bring the payout ratio down to about 95% from the trailing year (unsustainable) 105%.

On the one hand the yield will remain quite attractive at the recent price around $14.00. And the fund has the ability and plan to buy back some units especially if the price falls on this news.

On the other hand the restaurants appear to be losing market share. This could cast a shadow over the business that will make entrepreneurs reluctant to open a BP. We could see closures that would further pressure distributable cash per unit.

Overall, it is probably not wise to be over-exposed to this name. Still, I might be tempted if the price drops to $12 or lower. The yield is good. But fundamentally the business has weakened and there is no assurance it will resume growth. On the other hand unless there quite a few closures, then the business should continue to generate good cash flows. It may well be that this reduction will be “once-and-done”.

 

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