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Income Trust Pick: A&W Revenue Income Fund (Public, TSE:AW.UN)

Tuesday, August 25, 2009

Income Trust Pick: A&W Revenue Income Fund (Public, TSE:AW.UN)

Main competitors: McDonald's Corporation (Public, NYSE:MCD), Burger King Holdings (Public, NYSE:BKC), Wendy's Arby's Group Inc. (Public, NYSE:WEN), Jack in the Box Inc. (Public, NASDAQ:JACK),  Yum! Brands, Inc. (Public, NYSE:YUM).

A&W Revenue Income Fund (AW.UN) is one of my top picks for a TFSA or RRSP. The fund is currently trading around $13.75 and the most recent monthly distribution was announced August 5, 2009 @ $0.106 per share which works out to a yield of 9.25% annual. The dividend distribution is very good, especially if you hold this investment in an account that benefits from no taxes; however, this is not the main reason why I like this income trust so much.

Over the past month I have done a bunch of research into AW.UN and the morning of Monday August 24, 2009 I pulled the trigger and bough some in my TFSA account. The following details are what I based my decision to purchase this stock on:

1. I have reviewed the past few weeks of analysts’ reports prepared by Thomson Reuters. They rank stocks on a scale of 1 to 10 and AW.UN-T has not ranked below a 9/10 over the past year. It is currently ranked a 9 while the Travel & Leisure Sector average is a 6.8.

2. Thomson Reuters lists the trust under TRAVEL & LEISURE / TRAVEL & LEISURE / RESTAURANTS & BARS and I am not currently exposed to this sector. This has been one of the harder hit sectors during the recession since people have gone out less often and traveled less often.

3. The income trust made a new 6 month high in the beginning of August and the long term up trend has continued since October of last year. This has been a strong investment throughout the recession and the next point 4 has a lot to do with that.

4. A&W Restaurants is the fastest growing Fast Food Chain in Canada Today. Sure they are growing and they have great brand recognition with the Baby Boomers but do you think this growth will continue or their distributions continue? I would have to say yes, and yes; now let me explain:

Will A&W restaurants continue to grow in Canada?

Yes they will and I am sure you have not heard this reason before—over the past year A&W has been aggressively poaching experienced real estate professionals. They have hired a number of professionals specifically for the purposes of finding new properties to lease for their franchises. Each professional was given a Province and then they were sent travelling all over Canada looking for places to expand. How do I know this? I visited the Sauder School of Business career website over the past year on a number of occasions to see what kind of positions are out there for professionals. I remember reading the job descriptions and they required a significant amount of experience and willingness to travel within the designated areas.

Will A&W restaurants dividends continue to grow?

Yes they will because the recession has influenced peoples spending habits. During the recession more people went to A&W restaurants instead of middle of the road restaurants like Cactus Club, White Spot, Boston Pizza, the Keg, etc because they wanted to save money. The only restaurant that has seen a larger increase is McDonalds. The mentality of the North American consumer has changed during this recession from one of shopaholic living on credit to credit conscious savers. We are now more like our Grand Parents ready and willing to save for emergencies.

5. The Price to Earnings ratio of A&W Royalties Income Fund is currently only 9.91. I think anything in the single digits presents lots of upside potential.

As a result of these factors I bought A&W Royalties Income Fund and I plan to hold this in my TFSA for the long term.

I still am bearish on the overall outlook of the TSX and S&P indices, believing that a correction will take place in September; however, I do not think we will retest the lows achieved a few months back anymore, even if the commercial real estate shock occurs in the United States. Even if another correction occurred, this stock would just become a better buy for the long haul.

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