Are Dividend yields attractive? Restaurant stocks, reflecting the difficult operating environment, now often provide a dividend yield that is not far from the return on US Treasuries. Since dividends, from 1926 have contributed an impressive 32% of total S&P 500 returns. It follows that dividend paying restaurant stocks can provide a safety cushion over time, while waiting for operating conditions to improve. The Current next 12 months’ (NTM) expected dividend yields (along with Dividend Payments, i.e. “Payout” as a percent of NTM Net Income), are shown below:
While some of these yields are tempting, the dangers are two-fold. First, the dividend could be cut, as at Cracker Barrel, which recently drove down the stock price sharply. Secondly, a small decline in stock price, from general market or industry specific factors, can wipe out a year or more of dividends. That’s tolerable if predictable corporate growth can drive the stock back up over time, and the dividends (hopefully sustainable) will help while we wait.
The possibility of lackluster growth, or poor dividend coverage (a high Payout %), allow us to bypass Dine Brands, Cracker Barrel & Wendy’s for sure, and creates discomfort relative to Cheesecake Factory and even Starbucks. While the dividend yields are not huge at Papa John’s, Darden, Jack in the Box, Restaurant Brands or Arcos Dorados, averaging around 3%, it can add up over a number of years. Texas Roadhouse and Domino’s, with yields only around 1.5% may be attractive investments, but the dividend is not an important factor. Of special consideration are YUM China and Bloomin’ Brands. YUM China is statistically cheap at about 7x TTM EBITDA, has a modest 1.8% yield, but has repurchased stock recently that reduces its Enterprise Value by about 10%. Bloomin’ Brands is an attractive candidate also, for its 5.7% yield that seems secure at only 40% of net income, augmented by repurchasing 10% of its Enterprise Value in the last twelve months. In conclusion, dividends can help a lot, and from that standpoint the best candidates are Bloomin’ Brands, YUM China, Papa John’s, Darden, Restaurant Brands, Jack in the Box, Arcos Dorados and McDonald’s. They all have material dividends, a safe ratio of dividends compared to net income, a good possibility (if not a probability) of future growth, also providing the probability of dividend increases over time.
A word on gold: An increasing gold price largely reflects lessening confidence in the U.S. dollar. It is not comforting that gold is at a record high close to $2,600 per ounce, up over 20% in 2024. Worldwide central banks, buying since 2009, now absorb about 1,000 tons annually, about 30% of worldwide production. China, India, Russia, Turkey and others have long disclosed their purchases, and the Saudis just recently admitted to a secret purchase of 150 tons. The gold-versus-dollar plot is further thickening because of a meeting scheduled for October 22-24 in Russia, at which will be discussed a new trading “UNIT”, a basket of 60% “BRICs+” (Brazil, Russia, India, China+?) currencies and 40% gold. In addition to China and Russia, predictable advocates of a non-dollar trading system, 59 other countries have indicated interest. The implications are major, so say tuned.
In restaurant land, the new standard is the McDonald’s $5 meal, at your peril: If you must, follow McDonald’s and Burger King pricing to $5 and Wendy’s to $3 but that will not be much of a hospitality-driven dining experience, especially since is is provided these days largely through the drive-thru window. It would be therapeutic to admit that your product is a non-differentiated commodity, a strictly functional “fuel top.”. If fuel stop it must be, differentiate that product because there are lots of places to fuel up as well. Easy it is not, but easy businesses are rare.
Roger’s Lipton has followed the restaurant industry and worldwide fiscal/monetary trends since the 1970s. He publishes regularly through his website, www.rogerlipton.com, strategically advises restaurant & franchising companies, and manages individuals’ portfolios of publicly traded gold mining companies. He can be reached at lfsi.com or 646 270 3127.
