A Once in a Decade Opportunity: 1 Magnificent Dividend Stock Down 40% to Buy and Hold Forever

Home to more than 90 snack and restaurant brands spanning the quick-service, fast-casual and casual dining industries, MTY Food Group (MTYF.F 0.55%) is one of those companies you’ve probably interacted with but don’t know by name. Some of its most prominent brands are Papa Murphy’s, Cold Stone Creamery, Famous Dave’s, Village Inn, Wetzel’s Pretzels, Thai Express and TacoTime.

With more than 7,100 locations, MTY Food Group operates the vast majority of its stores through a franchise model, giving the company a high-margin, easy-to-activate profile. Generating positive free cash flow (FCF) every year since the turn of the century, the stock has generated total returns of 3,600% over that period — or seven times the S&P 500 Index return.

Despite this track record — along with earnings before interest, taxes, depreciation and amortization (EBITDA) and FCF growth of 81% and 73% over the past five years — the share price for MTY’s over-the-counter trading in the US has declined by 40% from the maximum.

Here’s why this downturn could be a once-in-a-decade opportunity for investors.

MTY Food Group: A serial acquirer

MTY Food Group has made 50 acquisitions since 1999, including 27 in the past decade. While companies that rely on megamergers or one-off jumbo acquisitions to fuel their growth often disappoint, serial acquirers like MTY often turn out to outperform.

A recent analysis from McKinsey that looked at businesses from 2013 to 2022 showed that stocks with a mergers and acquisitions (M&A) program in place outperformed the broader market by 1.8 percentage points. While this is a shorter time frame than I would like to see, certain companies have proven able to reinvest their FCF in M&A at a very profitable rate, and MTY fits that bill.

Over the past decade, MTY has posted an average return on invested capital (ROIC) of 15%, generating high levels of FCF relative to the debt and equity it uses to finance its M&A ambitions. Compared to a weighted average cost of capital (WACC) of 7%, the company consistently creates value for investors.

By spending its FCF on new acquisitions, the company is focused on building its food brand empire.

MTYFF Free Cash Flow and EBITDA data by YCharts

After making two major $200 million acquisitions of Wetzel’s Pretzels and BBQ Holdings (Famous Dave’s) in 2022, the company has halted its M&A spending over the past year. That $400 million expense gives the company plenty of integration work to do as it focuses on paying down its $686 million net debt balance.

While that $686 million in debt may seem alarming, the company maintains a debt-to-adjusted EBITDA ratio of 2.6, which is in line with its historical norms and acceptable for a consistent FCF-generating business like MTY.

Image source: Getty Images.

Steady free cash flow funds a growing dividend

MTY Food Group has grown its FCF per share by 251% over the past decade, allowing for ample dividend increases at the same time.

MTYFF Dividends Paid and FCF (TTM) data by YCharts

If the company had not suspended dividend payments in the early days of the pandemic out of an abundance of caution, it would most likely have increased its dividend every year since 2010. Despite these dividend increases over time, the MTY’s cash dividend payout ratio is just a mere 14%, leaving a ton of room for future growth. Given that the company already pays a respectable dividend yield of 2.5%, there is plenty of passive income potential possible from an investment in MTY.

In addition to this promising dividend, management has been buying back shares over the past five years, reducing the company’s share count by 1% annually over that time. Best yet for investors, with the board and management owning 16% of MTY’s outstanding shares, they are well motivated to continue these shareholder-friendly cash returns.

MTY review once a decade

As promising as MTY’s brand portfolio, FCF growth, and serial acquisition strategy are, its current once-a-decade valuation may be even more intriguing.

Right now, the company’s enterprise value-to-EBITDA and enterprise-value-to-FCF ratios are very close to 10-year lows — outside of the March 2020 dip.

MTYFF EV to EBITDA and EV to FCF data by YCharts

In addition to these valuations, MTY’s dividend yield of 2.5% is well above its 10-year average of 1.5% and is the highest ever outside of 2015, when the company paid a special dividend and in during the pandemic, when the market briefly fell.

Ultimately, MTY Food Group isn’t going to set the world on fire with mind-boggling growth rates. However, the company’s track record as a serial acquirer, its top FCF generation and its ample cash returns to shareholders make the franchisor a magnificent dividend stock to buy at today’s once-in-a-decade valuation.