Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that this stock doesn't share the same macro risks that other companies have, but it's a step above your common grade of dividend stock. Check out the previous selection.
This week, we'll turn our attention to the casual dining sector and highlight a long-term growth story set to pay out handsome dividends to shareholders: DineEquity (NYSE:DIN).
A highly competitive business
Through the past two-plus years that I've run this series, we've always begun with the challenges that a highlighted company faces; and like all of its predecessors, DineEquity, the company behind Applebee's -- the nation's largest casual-dining chain -- and IHOP has a number of challenges it will have to overcome.
Perhaps nothing is a greater concern for Applebee's than the fact that the restaurant sector is riddled with competition. The casual-dining category has brand-name competition from the likes of Chili's, growing pressure from hybrid restaurants like Chipotle that offer quick but nutritious food in a sit-down environment, and even fast-food chains, which can handily undercut casual dining chains on price and speed of food delivery. This makes standing out from the crowd difficult for casual-dining restaurants like Applebee's and IHOP unless they offer customers promotions that entice them into their restaurants. While they improve traffic, these promotions can be margin killers if used improperly.
Another concern that restaurants have to contend with is the rising cost of food and labor. Food costs have been generally under control for the past couple of years; however, the Consumer Price Index has dealt consumers three pretty sizable increases over the past four months, possibly signaling that costs, including food costs, are beginning to head higher.
By a similar token, measures being undertaken in Seattle, which will phase in a minimum wage increase to $15 per hour over the coming years, could have a huge impact on restaurant and service sector pricing. Though a federal minimum wage boost to $10.10 per hour has stalled out in Congress, the pressure of wage increases isn't likely to go away anytime soon. If restaurants are unable to pass along price increases to consumers, these costs could get the better of them.
Finally, investors should understand that the restaurant industry can be inherently cyclical because it's intricately tied to consumer spending -- which, in turn, ebbs and flows along with the health of the U.S. economy. Contractions within the sector are to be expected every now and then.
The DineEquity advantage
In spite of these concerns, I suspect that DineEquity has multiple avenues of growth that could reward investors with impressive share price and dividend growth over the long term.
Perhaps no factor offers DineEquity a better opportunity of standing out from the crowd than its complete rollout of 100,000 consumer-facing tablets at its 1,800 Applebee's locations over the coming year. Make no mistake, purchasing 100,000 tablets isn't cheap and the rollout isn't going to be flawless. Nothing of this scale has ever been attempted before, so it'll take some getting used to from the aspect of both servers and customers. Buffalo Wild Wings and Chili's Bar and Grill owner Brinker International have both tested tablets in select restaurants and have also decided to turn to tablets as a solution to attract a younger crowd and improve business. But it's Applebee's that'll likely be the first to have its full system in place, and thus the first company in line to really see big benefits.
To begin with, consumer-facing tablets give consumers the ability to place their drink, appetizer, and dessert orders ahead of being greeted by their server, helping to improve food and drink delivery efficiency and instilling a sense of control in the customer. Furthermore, these tablets give consumers the ability to pay without waiting for their server, which ultimately may help restaurants turn their tables faster and lead to bigger profits.
Secondly, these tablets give restaurants a way of attracting families with young children that have been reluctant to go out to eat primarily because they fear trying to entertain their child or children in a public setting. The ability to load games and other forms of media on tablets could attract an oft-ignored group of consumers back into Applebee's.
Finally, tablets give users the ability to voice their feedback at the push of a button. Restaurants have a difficult time figuring out how they can improve if consumers don't offer their opinion, and the current system of phoning in or going on your mobile device or PC to complete a review delivers few results. By providing consumers the instant ability to offer feedback with a tablet directly in front of them, restaurants like Applebee's will be able to respond quickly on a restaurant-by-restaurant basis to consumer concerns, which I expect will boost its image and business profitability.
Menu changes have been another source of growth for DineEquity. Two years ago DineEquity chose to completely revamp IHOP's menu by stripping it down to the basics and enticing customers with traditional value meals. It appears to have worked, with IHOP's domestic systemwide same-store restaurant sales up 3.9% in first quarter compared to the prior year. Applebee's same-store sales slipped 0.5% in Q1, but I'd attribute this more to weather conditions than an endemic problem with the chain.
Finally, DineEquity is looking to boost its growth potential by looking overseas. By entering new markets, especially emerging markets, DineEquity may be able to avoid the cyclical swings often associated with the restaurant industry within the U.S.
Show me the money
But let's have a look at why we're really here today: DineEquity's incredible dividend.
Between 2003 and 2008 DineEquity paid a pretty fair quarterly payout of $0.25 per share. At $1 annually, this was often more than enough to attract income-seeking investors. But the Great Recession changed all that. DineEquity chose not to pay a dividend between 2009 and 2012 in order to address its debt situation and realign its growth strategy.
Apparently that growth plan worked really well, because in February 2013 DineEquity announced a quarterly payout of $0.75. In other words, DineEquity boosted its payout from what was a low-to-mid 2% yield between 2003 and 2008 to a yield that's getting really close to 4% despite its share price doubling. This means income investors can actually get a better yield by purchasing DineEquity than a 30-year Treasury bond! Furthermore, with a payout ratio of 68% this year and 58% based on its forward earnings, it's evident not only that DineEquity is doing right by shareholders, but also that its payout is in all likelihood sustainable.
And as added icing on the cake, DineEquity also approved a $100-million-share repurchase agreement in February 2013 that removes outstanding shares and can make the company appear more attractive from a valuation basis.
Obviously, it's not going to be a clear path to success for DineEquity, but being among the first to adopt consumer-facing tablets with its Applebee's brand, and recognizing its overseas opportunity with IHOP, I'd suggest that DineEquity could deliver impressive share price and dividend growth for patient shareholders over the long haul.