IHOP (NYSE: IHP)'s second-quarter report, which the company released yesterday, provides an encouraging progress update on the company's strategic remake. This positive report comes on the heels of a strong first quarter, as Will Ashworth reported back in April.
No doubt, 2004 is a transition year for IHOP. It is shifting from a company-financed development model to traditional franchise development. The goal of this transition is to generate significantly more free cash flow, which the company then plans to return to shareholders.
While earnings for the quarter were down 60% compared with the prior year, much of this was due to costs related to the strategic repositioning. IHOP's top-line results compare remarkably well to hot restaurant concepts such as Cheesecake Factory (Nasdaq: CAKE), which Phil Wohl recently raved about after it posted growth of 4.5% in same-store sales in its most recent quarter. Same-store sales at IHOP were up 4.2% for the quarter and 5.6% for the first six months of 2004 -- not bad for a family restaurant that has been serving up pancakes since the mid-1950s.
Cash flow also improved significantly. Operating cash flow for the first six months of 2004 was $32.6 million, up only slightly from 2003, but capital expenditures were down significantly because of the new development model, from $49.6 million to only $9.0 million. The net result was significantly higher free cash flow dropping to the bottom line.
IHOP is committed to returning this cash to its shareholders. The company's dividend yield currently stands at 2.76%, significantly higher than most other companies in the restaurant industry. Of its peers, only struggling Bob Evans (Nasdaq: BOBE) even comes close with a dividend yield of 1.78%. Outback Steakhouse (NYSE: OSI) pays a dividend of 1.3%, while Applebee's (Nasdaq: APPB), Ruby Tuesday's (NYSE: RI), and Brinker International (NYSE: EAT) all pay less than 0.2%.
In addition to paying a nice dividend, the company is aggressively buying back shares. IHOP bought back 1.2 million shares in the second quarter, bringing the total number of shares repurchased under the current authorization to 1.9 million. On the conference call with analysts, management indicated that it would continue to aggressively repurchase shares.
As readers of the Motley Fool Income Investor know, solid companies that focus on generating cash and returning it to their shareholders are often the best-performing stocks over the long term. With that in mind, IHOP shares -- as well as its tasty pancakes -- merit the attention of Foolish investors.
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Fool contributor Salim Haji lives in Denver and does not own shares in any of the companies mentioned.
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