Brief Review A&W Income Fund Quarter Results

     There is a lot of variety in Canada when it comes to fast food chains.  These restaurants included Burger King, McDonald's, A&W and Wendy's.

      The Fund is a limited purpose trust established to invest in A&W Trade Marks Inc. (Trade Marks), which indirectly owns the A&W trade-marks used in the A&W quick service restaurant business in Canada. The trade-marks comprise some of the best-known brand names in the Canadian foodservice industry. Trade Marks licences these trade-marks to A&W Food Services of Canada Inc. in exchange for a royalty of 3 per cent of the sales of 861 A&W restaurants in Canada. Source: A&W Income Fund website  )                           

       This structure makes the A&W Revenue Royalties Income Fund a "top-line" fund because income is based solely on the sales of A&W restaurants minus the Fund's and Trade Marks' minimal operating expenses, interest on Trade Marks' term debt and income taxes. The Fund is not subject to the variability of earnings or expenses associated with an operating business. (Source: A&W Income Fund website )

A&W has changed their menu in the last 3-5 years to such as can be found in this list of facts.  I will highlight some of those here:

• In 2013. A&W started to use beef that is raise without the use of hormones or steroids.
• In Sept 2014, A&W started using chicken that was raised without the use of antibiotics and fed  a grain-based, vegetarian diet without the use of animal by products.
• In Feb 2016, A&W started to use pork raised without the use of antibiotics.

    With these changes over the last several years, this has increased the prices on the menu up besides increases due to inflation.  A&W also has a lot of restaurants in Alberta and Saskatchewan, which have seen there economies struggle over the last 3 years with falling oil prices.

      The number of restaurants in the royalty pool increased from 838 to 861, which is updated every January.  This represents a increase of 2.67% in the restaurants in the royalty pool.

      A&W saw a decrease of 0.3% in Same Store Sales growth from the period between January 1 2017 to March 26 2017.  For the same period in 2016, there was an increase of 8.6% in same stores sales growth.

       The royalty income increased from $7314000 for Q1 2016 to $7355000 for Q1 2017, which represents an increase of  just 0.56% .  This small increase in royalty income and increase in expenses for administration of the fund and an increased distribution as pushed the payout ratio higher. Since this is an income fund, A&W must pay out 90% or more of their profits as distributions to unitholders.

      The income fund has fallen over the last month by 10.94% and 3.03% on May 29. The fund pays monthly distributions. 

Disclosure:  I own 38 units of AW.UN in my TFSA and 115 units of AW.UN in my trading account.

EDIT (May 30 2018) - This stock has had a rough start to the trading day once again. We have also had lots of things happen recently.  The Green party is British Columbia holds the balance in power.  They now have a agreement in place with the NDP, in which the current government will lose power. If this gets approved then I believe the NDP will form the government.  The NDP has said they will increase corporate taxes.  

   The premier of Ontario has announced that the minimum wage in Ontario will change dramatically. It is already set to go increase from $11.40 to $11.60 this October. In her announcement, Premier Wynne stated the minimum wage will increase to $14 on Jan 1, 2018 and to $15 the following year.  I personally think this will have dramatic effects. People of all income levels are not happy with the prices in stores now. Businesses have to raise their prices in order to increase wages.  

    The minimum wage in Alberta is supposed to be raised by $1.40 on October 1, 2017 and then raised to another $1.40 on October 1, 2018.  A&W has lots of restaurants in Alberta.  With the state of the economy in Alberta, these stores are going to struggle financially.

    I wish I would of set a stop loss in the trading account.  This position has a purchase price of $36.65.

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

Market Outlook

      The markets are moving sideways or upwards.  At the time of this writing, the S&P 500 closed Friday at 2415.82, which is  slightly below it's all time high. North of the border, the TSX Composite Index closed at 15,416.93.  The TSX Composite Index has been in a channel between basically 15300 and 15900 since the beginning of 2017.

      With the markets being at or near their all time highs, lots of investors are becoming fearful.  In Canada, the energy is one of the main industries for investors to invest in .  With oil trading anywhere between $45 and $53 per barrel, this definitely hurts the bottom lines of the oil patch companies.  In fact, a lot of laid off workers in the oil patch are hesitant to go back.  Furthermore, a lot of companies are offering lower wages. A few months ago, it was mentioned on the Business News Network aka BNN that a company who used to pay people $40 an hour hired people back at $15 an hour.

       The actual drilling rig activity in western Canada can be shown in the following weekly chart.

Source:  CAODC website

          The price of a barrel, on top of spring "break up", have a large impact on companies willing to drill right now.  These numbers would be slightly higher, but it is spring break up.  Spring breakup in western Canada, usually occurs between April and May. Basically, spring break up is where oil patch activity slows down tremendously due to the thawing of the ground.  The dirt roads become difficult to drive on and lease roads are even more horrific.  A lease road is basically a road off a main road or a dirt road that was not there recently.  These lease roads can be right through a wooded area some times. These lease roads start of smooth and there get more difficult over the time the rig is in operation due to weather events and large trucks coming in and out.  Canada is also a high cost producer for oil.

      Why all the mention on oil?  Energy companies are a major part of the Canadian markets and lot of these companies are struggling to maintain profitability.  To makes matter worse, the North American market is due for a recession. As nobody has a crystal ball,  we do not know when the recession is coming but it has been roughly 9 years since we had one. When there is a recession, the oil companies are not immune.

      Investors in Canada have limited investing opportunities within our borders. In order to invest in some sectors, we have to purchase US stocks. The companies like the Johnson &Johnson, Coca-Cola, Peps, and Phillip Morris do not exist up in Canada. Ideally, Canadians should buy US stocks when our dollar is on par with the US dollar.

   With the Canadian dollar trading at approximately $0.74 US, a Canadian investor is better off purchasing their investments in Canada.  With the state of the financial markets, investors have to be more careful in their entry points. A fellow blogger, Jason Fieber, recently published an article on a Daily Trade Alert with a video which  can you explore here.  At the bottom of Jason's article is a link to a video where Jason talks about how he researches stock.  Jason was the founder of the blog www.divendmantra.com and now is the founder and publisher of mrfreeat33.com

    Conclusion:

     With the markets at an all time highs, investors have be more careful at picking stocks and picking their entry points. Investors need to grow their cash position, so they can take action when an opportunity arises.  We do not know when the recession or a 10% to 20% correction will come.  If we did, we would be all more wealthy than we currently are.

      The new normal consists of less full time jobs and more part time jobs. Usually a company does not provide benefits for part workers.  Nowadays, an individual has to be open to working possible multiple jobs, become self employed or have side hustles.  The cost of living is going nowhere but up whereas wages are become stagnant or even less.  Since the 70s, wages have pretty much stayed the same adjusted to inflation.  I find a lot of people believe they get a "raise", when in fact they get a cost of living increase.  To me, getting a raise involves the employee being called into their boss's office and is praised for good performance and is rewarded by getting paid more. When an employee receives of cost of living increase, so do all his or her fellow employees.  For individuals to be able to invest frequently, their savings rate has to increase.  To increase his or her savings rate, an individual must lower their expenses and make more income.

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

Option Trades Update

       May 17 was a down day on the North American markets. Investors and traders are concerned over recent events involving the President of United States Donald Trump.  Adding to this, is the low interest rates that we have currently.  Another major issue is that of Home Capital Group (ticker symbol HCG.TO).  HCG.TO, which is in the mortgage business, continues to be the major topic of discussion. Savers are continuing to withdraw their money from their high interest savings account, which is putting strain on the HCG.TO bottom line.  HCG.TO recently got a 2 billion line of credit from HOOPP, which is Healthcare of Ontario Pension Plan to try to stay a float.  HCG.TO has said in the last week, that replacing the HOOPP line of credit is a top priority due to the high interest rate on the line of credit.

       In Canada, the TSX Composite Index was down 269.65 points which represents 1.73% decrease from the day before. The S&P 500 was down 43.64 points, or 1.82%, for the day.  The Dow Jones Industrial Average was down 372.82. or 1.78%, for the day.

      I currently have to put options set to expire this month. My short put in Royal Bank is set to expire on May 19th.  The stock RY.TO closed at $91.45 today. My strike price is $92.00 and it is for a single contract.

     My other put option is in another Canadian bank, TD Bank.  My short put in TD is set to expire on May 26th.  The stock TD.TO closed today at $62.26, which is below my strike price of $62.50.  I also currently own 100 shares of TD.TO.

     Today's closing prices of these stocks are over $8.00 per share below their 52 week highs. I am not worried at all with option assignment on these stocks, as the banks have proven over the years that they are excellent companies to own.  If Royal Bank option gets assigned I will likely write covered calls as I would like my entry point to be lower. 

Disclosure: Long 100 shares of TD in margin account.

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.