Source: Texas Roadhouse.
Texas Roadhouse (TXRH -0.95%) might not be the most well known restaurant company around. This is especially true if you live in a major city, where the company chooses not to operate. However, if you like stocks that can provide solid growth while also offering a robust dividend, this might be one candidate to seriously consider.
Dividend yield is juicy now
Texas Roadhouse has a market capitalization of $2.4 billion and yields about 2%. Using a stock screener, I found 16 restaurant companies with market caps from $500 million to $10 billion and dividend yields of 1% or more. Out of these companies, Texas Roudhouse has the 9th largest market cap and the 8th highest yield.
This is important due to the three general options that a company has to deploy capital. Management can choose to reinvest in the business, repurchase shares, or pay dividends to shareholders. The lifecycle of a company usually involves smaller (or no) dividends, while the company is in growth mode. This evolves over time to slower growth and higher payouts. A company like McDonald's has a rich yield at 3.2%, but it is a much larger company and enjoys fewer avenues for growth in the future.
Bone-in ribeye. Source: Texas Roadhouse
Great stock performance has kept the yield low(er)
Another factor to keep in mind when assessing a dividend is how the stock itself has performed over the last few years. A falling share price will increase the yield, while price appreciation will have the opposite effect. The two companies from my screen with the highest yields are DineEquity (4.5%), the parent company of Applebee's and IHOP, and Darden (4%), which counts Olive Garden and The Capital Grille among its many brands.
Over the past five years, Texas Roadhouse has continued to raise its payout from $0.08 per quarter in 2011 to $0.17 currently. Over that same time period, the stock has also more than doubled, leaving the yield largely unchanged. Had the share price remained flat, the yield would be about 4%, among the highest of its peers. Obviously, for an investor this is a great problem to have -- a growing share price alongside a growing payout are how wealth is created over time.
Many years of cash flow (and dividend) growth ahead
One of the secrets of Texas Roadhouse's success was alluded to in the opening paragraph. The company does not build restaurants in major cities where rents are higher, competition is fierce, and prices must be raised to stay afloat. By focusing on often overlooked areas, it has managed to grow to more than 420 restaurants in 48 states and three foreign countries.
By cutting its dividend, the company could surely finance a faster growth trajectory than the 25 to 30 company owned restaurants that it plans to open in 2016. Rapid growth, however, could dilute the brand, leave a shortage of qualified managers, and perhaps force the company to enter weaker markets where it has so far chosen not to venture.
So far, its current plan is working quite well. In the most recent quarter, company owned restaurant sales improved by 6.9%. Of the 30 or so restaurants it will open next year, at least five will be dedicated to the newer concept, Bubba's 33, which focuses on burgers, pizza, and beer in a more casual neighborhood atmosphere.
Texas Roadhouse also has a major growth driver in its future as it begins to adopt more technology in its restaurants. From the latest conference call, CFO Scott Colosi talks about how the company has tested table-side tablets, an app, and other features but has not yet launched them in all of its restaurants. He goes on to say:
We're just getting educated and continuing to see what folks are doing, what's working, what's not working, and what maybe makes sense for us in the future. But I would tell you where we haven't done anything yet, at some point we will definitely do some of these things.
Investors have already seen what a tremendous catalyst technology has been for other restaurant stocks like Panera, Starbucks, and soon, Chipotle. Texas Roadhouse is delivering solid comps, and I expect technology to drive them even higher in future years.
The next five years
As the company continues to roll out stores at a measured pace, it can use the additional cash flow to pay for higher dividends. The payout ratio is currently right around 50%, which I'm very comfortable with and should allow for regular payout hikes going forward.
In five years, I would love to see Texas Roadhouse still yielding right around 2%. If the share price and the payout both double along the way, that's where it will be, and we long-term investors will be looking forward to the next five to 10 years after that. If you're looking for a solid dividend stock with healthy opportunities for growth in its future, take a closer look at Texas Roadhouse -- I think you'll be happy that you did.
