Well, that was unexpected.

Shares of A&W Revenue Royalties Income Fund (TSX:AW.UN) surged 20% on Monday. This came after the company announced it would be changing up its corporate structure. But what does that mean for investors — especially after such a large jump in share price? Today, let's get into it.

What happened?

A significant catalyst for the recent surge in AW.UNâs stock price is the announced strategic merger between A&W Revenue Royalties Income Fund and A&W Food Services of Canada Inc. This merger will create a new publicly traded entity, A&W Food Services NewCo. This move is expected to unlock significant value for shareholders by providing them with full access to A&Wâs growth and capital-appreciation potentialâ.

Post-merger, unitholders will benefit from the combined companyâs enhanced financial flexibility and the ability to capitalize on growth opportunities more effectively. The new structure is anticipated to maintain existing distribution levels as dividends, currently at $1.92 per unit annually, while also offering the potential for increased capital gainsâ.

So, can the new company keep it up?

Looking back

Let's first try to understand more about the company's former finances to see if it can keep up a similar level of growth. A&W Revenue Royalties Income Fund recently reported its second-quarter (Q2) 2024 earnings, showing a 1.5% increase in royalty income compared to the same period in 2023. Year to date, the royalty income has risen by 1.3%. This growth is attributed to the opening of nine new A&W restaurants in the first half of 2024 as well as effective marketing campaigns that have bolstered sales across the franchise network.

Meanwhile, same-store sales growth (SSSG) for the second quarter was modest at 0.3%, and 0.5% year-to-date. This indicates that existing stores are maintaining steady sales, while new openings are contributing to overall growth. The gross sales reported by restaurants in the Royalty Pool reached $432.2 million in Q2. This was up from $425.8 million in the same period last year. This further demonstrated the franchiseâs expansion and increased market penetration.

A&W Revenue Royalties Income Fund exhibits solid financial health, with strong earnings and revenue growth. The companyâs earnings per share (EPS) for Q2 2024 was $0.56, up from $0.52 in the same period last year. This consistent earnings growth reflects the effectiveness of its business model and operational efficiencyâ.

Looking ahead

From a valuation perspective, AW.UNâs recent stock price increase still presents a reasonable entry point for investors. The stockâs price-to-earnings (P/E) ratio remains attractive at 17.7 times earnings relative to its growth prospects and dividend yield. This offers a balanced investment opportunity for both income and growth-oriented investors.

What's more, its ability to maintain and potentially increase its dividend payouts is underpinned by its strong cash flow generation. The company receives royalties based on the sales of A&W restaurants within its Royalty Pool, providing a steady income that supports regular dividend distributions.

Finally, A&W Revenue Royalties Income Fund is known for its attractive dividend yield, which currently stands at approximately 6.73%. The company has consistently paid a monthly dividend of $0.16 per share. This reliable income stream makes AW.UN an appealing choice for income-focused investors.

Bottom line

Altogether, investors should consider buying A&W due to its robust recent performance, strategic merger, attractive dividend yield, and strong market position. The companyâs growth trajectory is supported by new restaurant openings and effective marketing. Plus, with the anticipated benefits of the merger, it is positioned well for future success. With its consistent dividend payouts and potential for capital appreciation, AW.UN offers a compelling investment opportunity in the quick-service restaurant sector.

The post A&W Stock: Buy, Sell, or Hold? appeared first on The Motley Fool Canada.