We offer MTY Food Group’s stable free cash flow generating capabilities at a discounted price.
Home to more than 90 snack and restaurant brands across the quick service, fast casual and traditional food and beverage industries. MTY Food Group (MTYF.F 0.55%) is one of those companies you’ve probably been involved with but may not know the name of. Some of its leading brands include Papa Murphy’s, Cold Stone Creamery, Famous Dave’s, Village Inn, Wetzel’s Pretzels, Thai Express and TacoTime.
MTY Food Group operates over 7,100 restaurants, the majority of which are operated under a franchise model, making it an asset-light, highly profitable company. It has generated positive free cash flow (FCF) every year since the turn of the 21st century, and its shares have delivered a total return of 3,600% over that period. S&P 500 Index return.
Despite this track record of success (EBITDA (earnings before interest, taxes, depreciation and amortization) and FCF (liquid cash flow) growth of 81% and 73%, respectively, over the past five years), MTY shares traded over the counter in the U.S. are down 40% from their peak.
Here’s why this selloff could be a once-in-a-decade opportunity for investors.
MTY Food Group: Serial Acquirer
MTY Food Group has made 50 acquisitions since 1999, with 27 of those coming in the past decade. While companies that rely on big mergers or big one-off acquisitions to drive growth often end up disappointing, serial acquirers like MTY often outperform expectations.
A recent McKinsey analysis looking at companies from 2013 to 2022 found that stocks with mergers and acquisitions (M&A) programs outperformed the overall market by 1.8 percentage points. While this is a shorter period than I would like, it proves that some companies can reinvest FCF in M&A at very high rates of return, and MTY fits that bill.
Over the past decade, MTY has delivered an average return on invested capital (ROIC) of 15% and has generated high levels of FCF relative to the debt and equity it uses to fund its M&A ambitions. Compared to a weighted average cost of capital (WACC) of 7%, the company has consistently created value for investors.
The company is spending its FCF on new acquisitions and is focused on building its food brand empire.
MTYFF Free Cash Flow and EBITDA data Y Chart
The company is pausing M&A spending for a year following its $200 million acquisitions of Wetzel’s Pretzels and BBQ Holdings (Famous Dave’s) in 2022. The $400 million spending will allow the company ample time for integration efforts while it focuses on paying down its $686 million net debt balance.
While this $686 million in debt may seem alarming, the company maintains a debt-to-adjusted EBITDA ratio of 2.6, which is in line with the company’s historical norms and within acceptable limits for a consistently FCF-generating business like MTY.
Image source: Getty Images.
Stable free cash flow supports growing dividends
MTY Food Group has grown its FCF per share by 251% over the past decade, allowing for ample dividend growth over the same period.
MTYFF Dividends and FCF (TTM) data Y Chart
Had the company not suspended dividend payments out of caution early in the pandemic, it would likely have increased its dividend every year since 2010. Despite these dividend increases over time, MTY’s cash payout ratio is just 14%, leaving plenty of room for future increases. Given that the company already pays a respectable dividend yield of 2.5%, there is potential for a lot of passive income from investing in MTY.
In addition to this encouraging dividend, management has been buying back shares over the past five years, reducing the company’s share count by 1% each year during that time. Even better for investors, the board and management own 16% of MTY’s outstanding shares, so they have plenty of incentive to continue returning friendly cash to shareholders.
MTY’s Once in a Decade Review
MTY’s brand portfolio, FCF growth, and serial acquisition strategy are promising, but its current once-in-a-decade valuation may be even more interesting.
Currently, the company’s enterprise value-to-EBITDA and enterprise value-to-FCF ratios are very close to their lowest levels in the past decade, excluding the March 2020 dip.
MTYFF EV vs. EBITDA and EV vs. FCF data Y Chart
In addition to this recognition, MTY’s dividend yield of 2.5% is well above the 10-year average of 1.5% and is the highest it has ever been except for 2015, when the company paid a special dividend, and during the pandemic, when markets temporarily declined.
Ultimately, MTY Food Group isn’t going to wow the world with phenomenal growth rates, but the company’s track record as a serial acquirer, top-tier FCF generation, and ample cash returns to shareholders make the franchisor a great dividend stock to buy at today’s once-in-a-decade valuations.
