Grocery stocks have been reeling ever since it was revealed Friday that Amazon (AMZN) is buying Whole Foods Market (WFM). Amazon has a history of disrupting any industry it enters, usually to the detriment—and occasionally destruction—of existing players. For now, wise investors will simply stay away from grocery stocks. For investors who still want some consumer food exposure in their portfolio, consider Amazon-proof (for now) restaurant stocks instead.
The industry had a bit of a renaissance recently, and is a good place to find stocks that pay dividends and have reliable earnings growth.
Restaurant stocks struggled along with retailers during the first quarter, but the group started to pull away from the retailers in April. Between April 1 and May 31, the Dow Jones U.S. Restaurants & Bars Index (DJUSRU) advanced 11.5%, vs. a 2.1% gain for the S&P (and a 3.5% decline for the retail sector).
However, the advance stalled as May rolled into June, and the restaurant group is now pulling back, providing a buying opportunity for investors who missed the last advance.
Here are my seven favorite restaurant stocks that pay dividends.
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Restaurant Stock #1: Cracker Barrel Old Country Store (CBRL)
For investors who like consistency, but can also appreciate the occasional positive surprise, Cracker Barrel offers a nice mix of the two.
Cracker Barrel owns over 600 “southern country” themed restaurants, mostly located near highway exits. Each restaurant features a porch with rocking chairs and a gift shop.
The company has consistently grown revenues by low single-digits every year since 2009, while EPS have risen by double-digits in each of the last five years. Analysts expect the chain to deliver 1% sales growth and 6% EPS growth this year, followed by 4% and 7% growth next year. Eight analysts have increased their earnings estimates over the past month.
The surprises come from special dividends, which CBRL has paid in the third quarter of each of the last three years. This year’s special dividend of $3.50 per share will be paid to investors who own the stock by July 12—so you still have a few weeks to get in on it!
As for the stock, it’s been quiet for the past few years, and currently trades at a P/E of 20 and a forward P/E of 18. The regular dividend is $1.15 per quarter, for an annual yield of 2.9%. The company’s dividend payout ratio has held steady between 55% and 61% for several years.
Restaurant Stock #2: Dunkin’ Brands Group (DNKN)
Dunkin’ Brands is the parent company of Dunkin’ Donuts and Baskin-Robbins, which collectively have over 19,000 global locations, almost all franchised. The stock has been in a solid uptrend since the start of 2016, and is now trading near all-time highs.
The reasons are clear: after a tough 2015, earnings nearly doubled last year and the company beat earnings estimates in each of the last four quarters. Estimates for the next two years have been rising as a result, and Dunkin’ is currently expected to deliver 7.5% EPS growth this year and 9.9% EPS growth next year.
DNKN pays a quarterly dividend of 32 cents, for an annual yield of 2.3%. The dividend payout ratio is 55%. The stock trades at a P/E of 26 and a forward P/E of 24.
Restaurant Stock #3: Domino’s Pizza (DPZ)
DPZ is one of the most expensive stocks on this list, trading at a current P/E of 45 and a forward P/E of 39. The stock has been in a solid uptrend for over five years, thanks to management’s ability to consistently deliver double-digit EPS growth (and in each of the last three years, double-digit revenue growth as well). But growth expectations are still high! Analysts expect EPS to rise 27% this year and 19% next year. Revenues are expected to rise 11% and 10%, and of course estimates are moving up.
One key to the company’s success has been its embrace of technology; customers love the Domino’s app, which lets them order a pizza with a few taps and track its progress to their house.
Of course, like many fast-growing stocks, DPZ pays only a small dividend (46 cents per quarter) and currently yields slightly less than 1%. But if you’re more of a growth investor who dabbles in dividends, DPZ may be the restaurant stock for you.
Restaurant Stock #4: Darden Restaurants (DRI)
Darden owns Olive Garden, LongHorn Steakhouse, The Capital Grille and four other restaurant chains. The company also recently acquired Cheddar’s Scratch Kitchen, which has 165 locations and prides itself on cooking everything from scratch, as the name implies.
Earnings and revenues have been unpredictable in recent years, but the future looks very bright. After a great earnings beat in the latest quarter, analysts have been revising their estimates upward quickly. Revenues are now expected to rise 2.3% this year and 12.8% next year. EPS are expected to grow by 13% this year and 11% next year.
As a result, the payout ratio is coming down, after rising over 100% a couple of years ago. The current quarterly dividend of 56 cents yields 2.6% per year.
As for the stock, it laid low for most of 2015 and 2016, but took off in November and has since gained 37%. But it’s still less expensive than DNKN, trading at a current P/E of 23 and a forward P/E of 20. The current pullback from the all-time high hit earlier this month looks like a good buying opportunity.
Restaurant Stock #5: McDonald’s (MCD)
Everyone knows McDonald’s. What you might not know is that the company’s revenues have been shrinking since 2013. But the stock is hitting new all-time highs! Faced with declining sales, management has improved margins and cut capital spending, and as a result, EPS are expected to rise 12% this year and 7% next year (despite continued sales declines). Four analysts have increased their estimates in the past month.
Impressed by the results, investors started returning to MCD in late 2015, after a nearly four-year period of stagnation. The second half of 2016 brought a slight retrenchment, but the stock found its momentum again late in the year, and has been in an uninterrupted uptrend since November 1, gaining 32%. MCD now trades at a P/E of 27 and a forward P/E of 24, and yields 2.5%. The dividend is very stable; MCD has paid dividends since 1977.
Restaurant Stock #6: Restaurant Brands International (QSR)
Restaurant Brands International was formed by the 2014 merger of Tim Hortons and Burger King. (The ticker symbol, QSR, stands for “quick service restaurants.”) In 2017, the company bought Popeyes Louisiana Kitchen. Although based in Canada, QSR is 51%-owned by Brazilian investment company 3G Capital.
QSR has the unusual distinction of having increased its dividend every quarter for the past 10 quarters (that’s as long as it’s been a public company). Analysts expect sales to rise 10% this year and 8% next year. Eight analysts have increased their EPS estimates in the past month. Earnings are expected to rise 17% this year and 35% next year. QSR has beaten estimates in each of the past four quarters.
With that track record, it’s no surprise that the stock is trading near all-time highs, and at an elevated P/E ratio of 42. But for this combination of dividends and growth, the price looks worth it.
Restaurant Stock #7: Ruth’s Hospitality Group (RUTH)
Most small-cap stocks don’t pay dividends, so $22-per-share Ruth’s, with a market cap of $712 million and a yield of 1.6%, is a rare find.
The company owns and franchises fine dining restaurants under the brands Ruth’s Chris Steak House, Mitchell’s Fish Market and more. They currently have 160 restaurants, so there’s plenty of room for growth. They’ll never be McDonald’s—most entrées at Ruth’s Chris cost over $40—but the company is expanding steadily. Management currently expects to open four new company-owned restaurants this year and to franchise three. Analysts expect sales to increase 8% this year and 4.4% next year, fueling 10% and 7% EPS growth.
Management is sharing plenty of the wealth with investors, recently increasing the dividend by a generous 29%. The payout ratio is a reasonable 31%. The dividend history is short (four years) but RUTH only came public in 2005. The IPO was followed by a disastrous couple of years, which saw RUTH fall below $1 per share for a short time in 2009.
After an eight-year recovery, the stock is now trading at its highest point since shortly after the IPO. At this price, RUTH trades at a P/E of 23 and a forward P/E of 20. For investors who prefer lower-priced, smaller stocks but also like dividends, it’s a nice option.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More