When it comes to dividend growth stocks, perhaps a small-ish restaurant chain like Texas Roadhouse (TXRH 0.39%) doesn't immediately come to mind. So let me attempt to convince you why it should. Though it briefly suspended payments during initial pandemic lockdowns in 2020, dividends paid at Texas Roadhouse have increased 275% over the last decade.
Steady pay raises like this can really add up for shareholders over the long term, and it appears Texas Roadhouse is in good shape to continue its steady growth after a solid finish in 2022. Here's why I think this restaurant stock is a top buy for dividend investors.
2022 was anything but perfect, however...
The hot inflation in basic goods and wages over the last year-plus had a detrimental effect on many businesses, Texas Roadhouse included. In the first half of 2022, revenue increased 18% year over year, helped by rebounds in-store traffic compared to 2021, as well as menu item price hikes to partially offset rising costs. But inflation still took a big bite out of the bottom line. As a result, earnings per share (EPS) increased only 8% year over year.
Things started to turn for the better during the second half of 2022, though. EPS growth exceeded revenue growth in both the third quarter (revenue and EPS growth of 14% and 24%, respectively) and the fourth quarter (13% and 17%, respectively). Inflation in food, basic materials, and wages began to moderate. Menu price increases and slight increases in foot traffic helped, too.
Given a most difficult few years marked by one of the most disruptive events imaginable to the restaurant industry, Texas Roadhouse performed quite well. Shareholders were rewarded with a 20% increase in their quarterly dividend payout, with the next payout coming at the end of March 2023. The stock currently yields nearly 2.2% a year based on the new $0.55-per-share quarterly cash payment. Management also repurchased $213 million worth of stock in 2022 -- though it's unlikely Roadhouse will continue repurchasing shares at such an aggressive pace.
The new year is off to a great start
Texas Roadhouse has been a wonderful example of how slow-but-steady expansion can compound into big gains. Rather than expanding at a rapid pace, this restaurant chain instead focuses on incremental store growth into suburban and rural areas where real estate costs are often lower, as well as often overlooked by other restaurant chains. This has allowed Roadhouse to deliver profitable expansion for its shareholders -- resulting in a total return (including dividends) of 520% over the last decade. That's more than double the return of the S&P 500.
Data by YCharts.
Roadhouse continues to execute the playbook that has gotten it to this point. It expects to add just 25 to 30 new stores (including its newer Bubba's 33 sports bar concept) to its current base of 597 (plus another 100 franchised locations). But its value proposition to diners -- large portions of food at a reasonable price -- seems to be resonating more than ever. Management said comparable-store sales (a blend of foot traffic and average guest ticket size) increased 15.8% year over year during the first seven weeks of 2023.
Don't expect the rampant pace of existing store efficiency to continue, but it nevertheless illustrates how this restaurant chain is built to withstand both good times and bad. It isn't perfect. Texas Roadhouse pays on average low wages, a criticism that holds across a lot of the U.S. restaurant industry. There's room for improvement in that department. Valuation also isn't cheap. Shares currently trade for over 26 times trailing-12-month EPS, or 19 times on a one-year forward expected EPS basis. Employing a dollar-cost average plan, or periodically buying a few shares on any dips in share price, would be better than taking on a big portion of Texas Roadhouse all at once right now.
Nevertheless, this stock is a great one if you're looking for dividend-growth businesses to own for the long term. Texas Roadhouse belongs on your watch list, at the very least.
