The Facts (as of February 17, 2011)

Share price: $8.43. Book value per share: $6.99. Market cap: $83.5 million (small). Dividend: $0.15 per quarter or $0.60 per year (as of conversion). Current yield: 7.1%. P/E: 7.7. Debt/equity ratio: 16% . Payout ratio is targeted to be 75% to 85%, reflected by the dividend policy.

The Story

The Second Cup franchises cafes featuring freshly-brewed specialty coffees, espresso-type beverages, teas and other beverages, baked goods, and coffee-related gift products such as packaged specialty coffees.

The Second Cup was a corporation that profited mainly from franchising revenue. It converted to an income trust in 2006, then converted back to a corporation in 2011. It spent much of 2006 and 2007 trading between $10 and $11. In 2008, it crashed to just over $4 before climbing back over $8 most recently. It has relatively low debt, but high competition from Starbucks and Tim Hortons.

Pros

High payout, low debt. The company’s products are a luxury, but it’s possible that consumers traded down from Starbucks when the economy became difficult. With people now starting to feel better about the economy, the company’s profits may improve. The price seems attractive, relative to past earnings and past price.

Cons

The biggest drawback is the competition. Tim Hortons always has very long lineups and Starbucks stays busy with their premium coffee and atmosphere. The Second Cup finds itself right in the middle, and has never seemed very busy on the few occasions I’ve ventured inside. This is not a change from the past, however, and shouldn’t indicate a change in business fortunes.

Impression

This company seems like a reasonable investment. There is little predictability in earnings, but with a low debt burden and little operational risk, it should be attractive for its high dividend and reasonable payout. Having said that, the likelihood of future capital gains seems uncertain.

The Second Cup Ltd SCU

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