Franchise Group Inc. (NASDAQ:FRG) is a notable leader in the cash return area. The potential for shareholder returns through dividend increases and share buybacks is outstanding, with a 6.9 percent current yield.
The CEO of the Franchise Group Model is a seasoned private equity executive who has now expanded his business into public markets. Franchise Group selectively buys undervalued businesses with several locations. It integrates them into the more prominent firm while maximizing returns using its experience and power as a publicly traded company.
This strategy is carried out by turning newly acquired businesses into franchises. This technique involves selling the real estate to a third party and leasing it back to the original owner to unlock the value locked in the physical properties and collect franchise royalties from the new franchisees. By doing this, the business has developed an asset-light approach that makes it simple to scale its business.
At Franchise Group, CEO Brian Kahn has successfully applied this method to expand the business from a single holding to one that currently controls six different businesses.
Mr. Kahn has strategically diversified his interests across various industries and used operational synergies within each company. A runway for long-term profit growth can be seen in the backlog of locations awaiting conversion to the franchise model or opening new stores.
Dividend Increases Have Been Significant
The significant dividend increases provided to Franchise Group Inc. (NASDAQ:FRG) investors over the previous 18 months are well known. Management has demonstrated its commitment to maximizing returns to shareholders by increasing the share price from $1.00 per share in 2020 to $2.50 per share in 2022.
The firm intends to return value to shareholders in the form of dividends equal to 25% of EBITDA, as indicated in the 2021 Investor Presentation.
The enormous growth is nonetheless sensibly in line with the company objectives, even with 41 million shares and a $450 million EBITDA forecast for the 2022 fiscal year.
With a market worth of $1.5 billion at the time of the announcement, the recent buyback proposal of $500 million by Franchise Group Inc. (NASDAQ:FRG) would amount to the repurchase of 33 percent of all outstanding shares.
In FY2024, there would be about 27 million shares remaining after a 33 percent reduction in the number of outstanding shares.
According to the company’s current projections, EBITDA will reach $450 million in 2022, up 32% from FY2021. To be on the safe side, an EBITDA CAGR of 12.5% over the ensuing three years would amount to $570mm by the conclusion of FY2024.
Investors would get dividends per share of $5.28, or approximately 2.1 times more than the present distribution, if the corporation adhered to the dividend payout ratio. The expected dividend per share would amount to $4.17, a 67 percent increase from the current level, even assuming EBITDA experienced zero growth after 2022.
Comparable Business Model to Fast Food Industry
The fast food industry would be the greatest place to seek market averages for multiples applied to the stock because it is a company operating in a unique sector with a unique business style. Since most quick-service restaurant locations are still operated as franchises, the business strategy is identical across all these establishments.
With an industry average EV/EBITDA multiple of 18.8x, we can see that FRG is currently markedly undervalued at 8.2. Using P/FCF, we may observe a similar pattern, with an average industry multiple of 20.0x and an FRG valuation of only 14.4x. To determine a price target, add the reversion to this exit multiple, the anticipated EBITDA in FY 2024, and the anticipated $2.5 billion in debt.
The Bottom Line
Risks associated with Franchise Group Inc. (NASDAQ:FRG) include competition, a significant decline in consumer spending, and a restricted ability to franchise locations.
But at the current pricing, there seems to be a unique opportunity to buy in Franchise Group Inc. (NASDAQ:FRG) and get excellent gains. The company is in a desirable position for dividend growth investors because the payout alone will probably expand significantly.
Featured Image: Megapixl © Sebcz
