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Roy Allen’s "Patent"

By Dr. Steve Sjuggerud
Wednesday, December 7, 2005

Roy Allen has had a very profitable secret since 1919...

Back then, he bought the rights to a new invention from a fellow in Arizona - a pharmacist. That pharmacist had put together a concoction of herbs, spices, barks, and berries.

Allen had the idea to start selling this concoction. Long story short, it was a hit. By 1922, he had expanded rapidly. He took on a partner (who at the time was one of his employees), named Frank Wright. They were going nationwide.

By 1933, Roy Allen had over 170 franchised outlets selling his product. These retailers relied on Roy's product almost entirely - it was on the marquee in front of their businesses. So naturally, Roy charged them a license fee to use the name on their storefront.

Roy Allen had created a nearly perfect business...

Wouldn't it be nice to sit back and collect royalties on a product? Everyone else does all the work, pays all the bills, and takes all the business risk. And all you do is sit back and collect a fee from them every year.

Roy doesn't need any assets or even any workspace. He doesn't need any debt or obligations. Heck, he doesn't even really need employees. He just cashes the monthly checks.

The good news is, we can own this exact business. Roy Allen, in a way, is looking for partners...

By partnering up with Allen right now, we'll earn about 8% a year in income. And there is a strong likelihood that the income will increase, as I'll explain. It's really a simple idea...


The business I’m talking about today is Allen & Wright - or A&W, as you know it.

Roy Allen and Frank Wright started A&W Root Beer in 1922. You may remember growing up with the little A&W Root Beer burger joints when you were a kid. While we don't see many of 'em in the States, A&W restaurants are big business in Canada now.

A&W opened its first restaurants in Canada in 1956. It was Canada's first "chain" restaurant. By 1966, A&W had over 200 drive-in restaurants in Canada. Today, A&W restaurants are the 2nd largest burger chain in Canada, behind McDonalds. A&W has 630+ restaurants across the country.

Almost all of these restaurants are owned and run by franchisees... hardworking Canadians. They need the A&W name. When the customer sees that name, they expect the best fast-food burger in Canada, as well as a certain quality of service.

Because of the name, the franchisees are more than willing to pay their royalties to A&W. After all, how successful would their little hamburger business be without the name? It might be a success, but they couldn't know for sure - it would be a big risk.

The royalties A&W collects are three percent of sales, per year. Since A&W's sales have grown every year for decades (with the exception of one year, 1991), the 3% of sales royalty has grown steadily as well. It's important to understand that the royalty is based on a percentage of SALES, not on profits. So even if a franchisee struggles profit-wise in a year, the TOP-LINE royalty still must be paid.

Over the last 20 years, sales for A&W restaurants have increased at over 8% a year, with good stability (only one down year). A&W has been adding roughly 4% more stores a year, and they've seen roughly 4% a year in sales growth per restaurant.

Right now, the A&W Revenue Royalties Income Fund (TSE:AW.UN) is priced extremely attractively... At current prices, the dividend yield works out to over 8% a year.

Even better, that dividend could (and should) be raised, sometime soon. The fund has paid out a dividend of 9 cents a month (in Canadian dollars) since its inception in 2002. But sales have grown. And the fund's mandate is to pay out all royalties to shareholders of the A&W Revenue Royalties Income Fund.

Want to be partners in Roy Allen’s perfect business and collect royalties on the A&W name? Simply buy the A&W Revenue Royalties Income Fund.

The symbol in Toronto is AW-UN. (On Yahoo, the symbol is AW-UN.TO).

Good Investing,

Steve Sjuggerud

Market Notes


With global semiconductor sales reaching an all-time high of $20 billion in October (a 6.75% increase from one year ago), semiconductor stocks are sitting at new highs for the year.

A chart of the benchmark Philly Semiconductor Index (SOX) in the past year:

Kudos to Steve for getting True Wealth readers into a unique investment this summer to take advantage of the semiconductor rally: The PowerShares Dynamic Semiconductors Portfolio (PSI). This special semiconductor ETF is up 14% since its creation in June.

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