Dividend investors typically do not share much in common with growth investors. The former seeks to purchase the stock of mature, stable, and consistently profitable companies which provide a steady income stream. The latter gravitate toward companies with above average growth in revenue and loftier expectations of future profits. Finding a company with both traits is a bit like how I enjoy my steak -- rare.
Texas Roadhouse Inc (TXRH +0.43%) is a 480-unit restaurant chain with global aspirations. The company began paying a dividend in 2011 and has more than doubled its payout in just four years.
|
2011 |
2012 |
2013 |
2014 |
2015 | |
|---|---|---|---|---|---|
|
Dividends per share |
$0.32 |
$0.36 |
$0.46 |
$0.60 |
$0.68 |
Source: Company filings
At a payout of $0.68 per share and a stock price of about $37, an investment in Texas Roadhouse comes with a dividend yield of just under 2%.
An increasing payout is often a sign that a company is reaching a new phase in its business cycle. You see this currently playing out with Apple, a company that has defied gravity over the past decade. With a dividend yield over 2.5%, the once high-flying technology giant is now becoming attractive to value investors and dividend seekers. However, Texas Roadhouse is only a $2.6 billion company and is in the heart of its growth phase.
The company has grown from 345 restaurants in 2010 to 480 as of the end of September. The expectation for 2015 is to finish with 30 new restaurant openings. Comparable restaurant sales growth for individual units open at least 18 months is expected to come in at a mid-single digit percentage. Given that comparable sales growth through the first three quarters of the year came in at 8.1% for company restaurants and 7.4% for franchise restaurants, mid-single digit growth seems to be more than achievable.
Strong unit and comparable restaurant growth has resulted in double digit 5-year growth rates in revenue, earnings per share, and operating cash flow.
|
5-Year Annualized Growth Rate | |
|---|---|
|
Total Revenue |
11% |
|
Earnings per Share |
13% |
|
Operating Cash Flow |
11% |
Source: Company filings
What makes these numbers more impressive is that beef price spreads soared 49% from 2010 to 2014. Texas Roadhouse has only been able to partially offset commodity inflation through menu price increases.
|
Commodity Cost Inflation |
Menu Price Increases | |
|---|---|---|
|
2011 |
3.5% |
2.3% |
|
2012 |
6.4% |
4.4% |
|
2013 |
7% |
1.5% |
|
2014 |
3.4% |
1.8% |
|
2015 (expected) |
5% |
1.8% |
Source: Company filings
Looking forward, the company appears to be gaining momentum -- commodity prices are coming back down, and management expects the growth to continue.
Company guidance is for 25 to 30 new company restaurants in 2016. Long-term, management sees potential for 700 to 800 domestic Texas Roadhouse locations. As of the end of 2014, there were nine franchised international restaurants in four countries. The company also has franchise agreements in place for the development of Texas Roadhouse restaurants in the Philippines and Taiwan. A quick look at its international franchising website shows that the company has interest in developing restaurants in 27 different countries, so there is no denying that footprint expansion will be an ongoing focus for Texas Roadhouse.
In addition to domestic and international growth of its flagship Texas Roadhouse brand, the company has begun to develop Bubba's 33, a casual restaurant focused on pizza, burgers, and beer. With seven restaurants currently in operation and five planned openings in 2016, this brand is still in its infancy. However, Bubba's 33 provides another growth avenue beyond the core steakhouse.
Responsible capital allocation
The cash a company generates can either be reinvested back in the business or distributed to shareholders through buybacks and dividends. Texas Roadhouse has found that balance.
|
2011 |
2012 |
2013 |
2014 |
TTM | |
|---|---|---|---|---|---|
|
Operating Cash Flow ($in millions) |
$136.4 |
$148.0 |
$173.8 |
$191.7 |
$206.9 |
|
Capital Expenditures as % of OCF |
58% |
59% |
64% |
65% |
78% |
|
Dividends as % of OCF |
12% |
17% |
27% |
16% |
22% |
Source: Company filings
With an average dividend payout just under 20% of operating cash flow, Texas Roadhouse does not appear to be in danger of cutting its dividend.
Capital expenditures consist of new store openings along with remodels, maintenance, and expansions. There was a large uptick in capital spending in 2015, which was partially due to revamping the bar area in several restaurants, remodeling interiors and exteriors, increasing restaurant space, and expanding parking lots. Expanding restaurant space and parking lots are great signs of growth. Remodels and maintenance are necessary to keep the ambience from going stale. Therefore, the increased capex spending is not a concern at this point but something to monitor. A trend toward higher capital spending may be a sign of aging stores, accelerating growth, or a combination of the two -- both of which can jeopardize the size of future dividends.
With above average revenue and profitability increases expected to continue going forward, Texas Roadhouse is a growth stock. With a dividend yield near 2%, it is also a dividend play. Who said investors can't have their steak and eat it too?
