The Collins Foods Ltd (ASX: CKF) share price has risen by 417% over the last five years and I think it can keep growing at a good rate from here.
Collins Foods is the owner of the Sizzler restaurant brand and operates a large number of KFC outlets as a franchisee.
Here are three reasons why I think it could be a good buy today:
Growth in Europe
In the last few months Collins Foods updated the market to say that it would be expanding by buying KFC franchises in Germany and the Netherlands.
This isn't going to be rapid growth because the business will need to slowly and steadily acquire more franchises to make an impact. The more franchises it can fund from its own earnings the more sustainable the expansion will be.
Collins has a real chance to emulate some of its food outlet competitors like Retail Food Group Limited (ASX: RFG) and fuel growth for a long time by going international.
Growth in Asia
The business is also expanding in Asia with its Sizzler brand which has almost disappeared from Australia's shores.
The expansion has been patchy so far but the longer Sizzler operates in Asia the longer it has to build a loyal customer base and grow into other regions.
This segment of the business could grow into a material part over time.
Conservative dividend policy
Management know that taking on new debt or issuing new shares to fund growth isn't something that should be done lightly.
Collins Group has a reasonable dividend payout ratio of 59%. This allows a lot of the profit to be re-invested back into the business and buy more franchises.
The conservative policy has allowed Collins to grow its dividend every year since 2013.
Risks
Fast food is a very competitive market, there is a long list of domestic and international competitors that would like to take a bite out of Collins' market share.
Management and investors should keep an eye on the amount of debt on the balance sheet. Rising interest rates will make any debt more expensive and it will be harder to expand. Keeping the dividend payout ratio low is key for sustainable growth in the future.
Foolish takeaway
Collins is currently trading at 21x FY17's earnings with a grossed-up dividend yield of 4.05%. I think this is a good price to pay for a business that has the potential to keep steadily growing for a number of years.
