What are we looking for?
U.S. restaurant stocks offering healthy dividends and earnings growth combined with reasonable valuations.
Despite concerns about a slowing global economy, U.S. consumer sentiment remained strong in early 2019. The U.S. Consumer Sentiment Index published by the University of Michigan came in at 97.8 in March (the index is benchmarked to a level of 100 set in 1966), marking the second straight month of gains. Strong consumer sentiment drives discretionary spending in a variety of industries including the U.S. restaurant industry, traditionally one of the more volatile components of the consumer discretionary sector. In the past year, the Dow Jones U.S. Restaurant Index has climbed more than 22 per cent and shows prospects for further gains in the months ahead.
We will be using Trading Central Strategy Builder to search for U.S. restaurant stocks with strong earnings and dividend characteristics as well as reasonable valuation levels.
We begin by screening for U.S. restaurant stocks with market capitalization of US$1-billion or more. Next, we will look for companies with profitable businesses and a track record of growing earnings. We will select only companies with five-year annual growth rates in earnings per share of 5 per cent or more. Next, to ensure we are focused on reasonably valued firms in a generally hot market, we will filter for trailing price-to-earnings ratios of 30 or less.
Last, we will search only for stocks with dividend yields of at least 1.5 per cent and dividend coverage ratios of 175 per cent or higher. The dividend coverage ratio is a measure of how safe the dividend is and defined as the earnings in the past year divided by the dividends paid. A higher dividend coverage ratio is preferred and implies higher earnings for each unit of dividends paid.
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What we found
Wendy’s Co. top our list with a five-year EPS growth rate of 76.4 per cent and a P/E ratio of just 9.2. Since hitting a 52-week low on Dec. 24, Wendy’s stock has rallied 15.3 per cent and now sits just 4 per cent below its 52-week high of US$18. Wendy’s also provides a healthy dividend of 2.3 per cent and has grown its dividend nicely over the past five years.
Cracker Barrel Old Country Store Inc., a chain combining restaurants and gift stores, has the highest dividend yield on our list at 3.1 per cent. This dividend also looks very secure with a dividend coverage ratio of 183 per cent. Cracker Barrel stock hit a record high on Nov. 27, but has since declined by more than 12 per cent. On Feb. 26, the company released second-quarter results that included revised guidance for modest revenue and earnings growth for the remainder of 2019. Investors reacted by pushing the stock down by 9 per cent over the following two weeks.
McDonald’s Corp. is a U.S. dividend aristocrat, having paid a dividend quarterly without interruption since 1976. Over the past five years, McDonald’s dividend growth rate is 5.8 per cent. The stock has done well recently, up 18.7 per cent in the past year, handily outperforming the S&P 500, which is up just 7.4 per cent in the same period. That said, McDonald’s stock looks richly valued compared with several of its peers, with a P/E ratio of 24.9.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of customer success at Trading Central.