An A&W restaurant in Toronto on July 9, 2018.Tijana Martin/The Canadian Press
When I look at the U.S.-listed version of a Canadian company, it almost always seems to be up more, or down less, than its Canadian-listed counterpart. Is this just my imagination? Are Canadian investors better off buying stocks of Canadian companies on a U.S. exchange?
No. I think it’s your imagination. A share of Royal Bank of Canada – or any other Canadian company – traded on a Canadian exchange is identical to a share of Royal Bank traded on a U.S. exchange. The only difference is that one is quoted in Canadian dollars and the other in U.S. dollars, so their market prices should reflect the Canada-U.S. exchange rate and nothing more.
If the exchange rate is fluctuating, the Canadian and U.S. prices of an interlisted stock won’t move in lockstep with each other. But if the exchange rate is stable, one would expect the price changes, on a percentage basis, to correlate highly with each other.
To test this hypothesis, I created two watchlists on GlobeInvestor.com, each consisting of the 10 largest Canadian-listed companies that also trade on a U.S. exchange. (In descending order of market capitalization, the largest interlisted companies are Royal Bank of Canada RY-T, Toronto-Dominion Bank TD-T, Canadian Natural Resources Ltd. CNQ-T, Canadian National Railway Co. CNR-T, Enbridge Inc. ENB-T, Thomson Reuters Corp. TRI-T, Shopify Inc. SHOP-T, Canadian Pacific Kansas City Ltd. CP-T, Brookfield Corp. BN-T and Bank of Montreal BMO-T.)
The first watchlist consisted of the companies’ Canadian tickers trading on the Toronto Stock Exchange in Canadian dollars. The second watchlist consisted of the respective U.S. tickers trading on the New York Stock Exchange in U.S. dollars. I then compared the daily percentage change for each pair of Canadian and U.S. tickers at the close of trading on Monday of this week, a day when the Canada-U.S. exchange rate was steady.
Result: In all cases, the daily changes for the Canadian- and U.S.-listed tickers of the same company were virtually identical. The average spread was just 0.07 percentage points, which is negligible. What’s more, in five of the 10 cases the Canadian ticker had a slightly larger percentage gain (or smaller percentage loss) than the U.S. ticker, while in the other five cases the U.S. ticker did slightly better on a relative basis. Again, these differences were minuscule.
So no, Canadian investors are not better off buying shares of Canadian companies on a U.S. exchange. In fact, they will be worse off, because they would have to first convert their Canadian dollars into U.S. dollars, and brokers build a hefty profit – typically 1 per cent to 2 per cent – into their buy and sell spreads. Bottom line: If you want to invest in a Canadian company, buy it in Canadian dollars on a Canadian exchange. One exception would be if you already have U.S. dollars to invest, in which case you could avoid currency conversion costs by buying the interlisted shares on a U.S. exchange and moving them over to the Canadian side of your account.
Regarding your recent column about A&W Revenue Royalties Income Fund AW-UN-T, it would be interesting to know what its payout ratio is compared to peers. My cursory research suggests A&W’s payout ratio is in excess of 100 per cent, and I wonder if this high payout ratio is the cause of its poor share price performance.
Because of the seasonal nature of the restaurant business, the dividend payout ratio for royalty funds such as A&W varies considerably throughout the year. The timing of income taxes can also affect the payout ratio.
In A&W Revenue Royalties’ first quarter ended March 24, which is typically the burger chain’s slowest sales period, the payout ratio was 114 per cent. This indicates that the fund’s royalty income, which is based on a percentage of sales at A&W’s restaurants in the “royalty pool,” was not sufficient to cover its distributions in the first three months of the year.
However, in the previous three quarters, when A&W’s sales are typically stronger, the payout ratio averaged a more conservative 86.7 per cent.
Putting all four quarters together, the payout ratio for the 12 months ended March 24 was 91.9 per cent, which indicates that A&W Revenue Royalties’ current distribution of 16 cents a month, or $1.92 annually, is well covered by the royalty income the fund generates.
Similarly, fellow restaurant royalty company Pizza Pizza Royalty Corp. PZA-T had a payout ratio of 122 per cent for the three months ended March 31. “System sales for the quarter ended March 31 have generally been the softest and historically results in a payout ratio over 100 per cent,” the company said when it announced first-quarter results in May.
For 2023 as a whole, however, Pizza Pizza Royalty’s payout ratio was 97 per cent – again, indicating that its dividend is sustainable, barring a sudden downturn in its sales, as happened during the pandemic when Pizza Pizza, A&W and other royalty funds slashed their dividends.
When gauging the sustainability of a restaurant royalty company’s dividend, always look at the payout ratio on an annualized basis. You can usually find this information in the investor relations section of the company’s website.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails, but I choose certain questions to answer in my column.