It features over 90 snack and restaurant brands covering the quick service restaurant, fast casual and traditional dining industries. MTY Food Group (MTYF.F 0.55%) is one of those companies you’ve probably dealt with but may not know the name of. Some of its best-known brands include Papa Murphy’s, Cold Stone Creamery, Famous Dave’s, Village Inn, Wetzel’s Pretzels, Thai Express, and TacoTime.

With over 7,100 locations, MTY Food Group operates the vast majority of its stores through a franchise model, giving the company a high-margin, asset-light profile. The stock has generated positive free cash flow (FCF) every year since the turn of the century, delivering a total return of 3,600% during that time – seven times the S&P 500 indices return.

Despite this track record – and earnings before interest, taxes, depreciation and amortization (EBITDA) and FCF growth of 81% and 73%, respectively, over the past five years – MTY’s share price is 40% below its high in U.S. OTC trading.

For this reason, this decline could be a unique opportunity for investors.

MTY Food Group: A serial buyer

MTY Food Group has made 50 acquisitions since 1999, including 27 in the last decade. While companies that rely on mega-mergers or one-off jumbo acquisitions to fuel their growth often disappoint, serial acquirers like MTY often prove to be outperforming.

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

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

The company is investing its free cash flow in new acquisitions and is fully focused on building its food brand empire.

MTYFF Free Cash Flow and EBITDA data from YCharts

After making two hefty $200 million purchases of Wetzel’s Pretzels and BBQ Holdings (Famous Dave’s) in 2022, the company paused its M&A spending last year. This $400 million spend gives the company a lot of integration work to do as it focuses on paying down its $686 million net debt balance.

While this $686 million debt seems 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 company like MTY that consistently generates FCF.

Image source: Getty Images.

Steady free cash flow finances increasing dividend

MTY Food Group has increased its FCF per share by 251% over the past decade and has been able to make generous dividend increases during the same period.

MTYFF Dividend Payouts and FCF (TTM) data by YCharts

Had the company not suspended its dividend payments in the early days of the pandemic out of an overly cautious attitude, it would most likely have increased its dividend every year since 2010. Despite these dividend increases over time, MTY’s cash dividend payout ratio is just 14%, leaving plenty of room for future increases. Considering the company already pays a respectable 2.5% dividend yield, there is great passive income potential available with an investment in MTY.

In addition to this promising dividend, management has been buying back shares for the past five years, reducing the company’s share count by 1% annually during that time. Best of all for investors: Since the board and management own 16% of MTY’s outstanding shares, they have good incentives to continue these shareholder-friendly cash returns.

MTY’s unique assessment

As promising as MTY’s brand portfolio, FCF growth and serial acquisition strategy are, the current valuation, which is only reached once in a decade, could be even more interesting.

Currently, the enterprise value to EBITDA and enterprise value to FCF ratios are very close to the lowest values ​​of the last 10 years – apart from the slump in March 2020.

MTYFF EV to EBITDA and EV to FCF data from 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 it has ever been outside of 2015, when the company paid a special dividend, and during the pandemic, when the market briefly collapsed.

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