Sit-Down Restaurants Are a Haven for Income Investors

When it comes to restaurant stocks, most investors know the usual suspects among the fast-food purveyors. However, casual restaurants deserve their fair share of attention as well. These are sit-down chains that offer a higher-end experience than their fast-food peers, but unfortunately, many investors are too quick to gloss over them.

The truth is, the sit-down restaurant industry contains several highly profitable companies that deserve consideration. The improving economy means good things are in store for Darden Restaurants (NYSE: DRI  ) , DineEquity (NYSE: DIN  ) , and Brinker International (NYSE: EAT  ) , and they're each ratcheting up their shareholder rewards in response. As a result, investors would be wise to look further into these solid companies.

Sit down for a big plate of profits
Slowly but surely, Americans are digging themselves out of the massive hole caused by the financial crisis. Even though progress has been frustratingly slow, there have been measurable improvements made in the labor, housing, and stock markets. This means that at long last, consumers are finally standing on firmer financial footing. Thankfully for the sit-down restaurant industry, they're loosening the ironclad grip they've had on their purse strings since the recession.

Continued improvement in these measures will mean more consumer spending. As a result, casual restaurants stand to benefit. The largest of the group is Darden, the company behind the Red Lobster, Olive Garden, and LongHorn Steakhouse chains. Darden struggled in its recently concluded 2013 fiscal year, but its long-term strategy remains intact. The company has been spending heavily on expansion, which brought down fiscal 2013 diluted earnings per share by 12%. Much of this was due to the company's acquisition of 40 Yard House restaurants. However, several core metrics including traffic and sales from continuing operations showed year-over-year growth.

At the same time, Brinker International is in full-growth mode even in a tenuous environment for companies that depend on consumer spending. Brinker, which operates Chili's and Maggiano's, reported diluted earnings-per-share growth of 5% in the fourth quarter and 18% in fiscal 2013, year over year. Moreover, the company's future growth is expected to continue: Brinker expects same-store sales growth in fiscal 2014, which will result in at least 15% diluted earnings-per-share growth, according to management expectations.

Like Darden, DineEquity's profit is currently being restrained, but for a different reason. DineEquity is transitioning itself to the franchise model for its IHOP and Applebee's businesses, which has resulted in higher costs associated with the turnaround. This is why DineEquity's second-quarter diluted EPS fell 4% year over year. Nevertheless, shifting to the franchise model is still a strong long-term strategy. The franchise model is much more lucrative for restaurant operators because it places most renovation expenses on the franchisees.

Shareholder rewards aplenty
Darden's dip in full-year profits didn't stop the company from raising its dividend by 10% earlier this year. In addition, Darden also returned capital to investors through share repurchases. The company bought back 1 million of its own shares in fiscal 2013. Since the company first started buying back its stock in 1995, it has returned $3.8 billion to investors via share repurchases. Darden's 4.75% yield in today's low-interest-rate environment is hard to ignore.

Meanwhile, Brinker raised its dividend by 20% this year and authorized an additional $200 million in share buybacks. In total, Brinker's outstanding share repurchase plan calls for the company to buy back $480 million of its own shares.

Ditto for DineEquity, which is itself committed to returning cash to shareholders. DineEquity resumed paying dividends to investors for the first time since 2008, and it has already proven that it won't be stingy with distributing its profits. The company's $3 per-share dividend amounts to a hefty 4.5% yield at its recent stock price.

Consumer spending remains resilient so far in 2013, which means that sit-down restaurants such as Darden, Brinker, and DineEquity stand to reap considerable rewards. Each of these stocks pays a dividend that beats the yield on the broader market, and the stocks' outlooks are bright. For high-quality stocks with big dividends, look no further than casual restaurants.

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