Tags: sonic corp | fast food | dividend | growth

Sonic Corp: Small-Cap Fast-Food Stock Primed for Dividend Growth

Sonic Corp: Small-Cap Fast-Food Stock Primed for Dividend Growth
(Ken Wolter/Dreamstime.com)

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Wednesday, 29 August 2018 11:09 AM Current | Bio | Archive

The Russell 2000 Index holds approximately 2,000 small-cap stocks that are part of the Russell 3000 Index, which contains the biggest U.S. stocks. The Russell 2000 Index focuses on the smallest companies in the Russell 3000 Index, and therefore the Russell 2000 Index is viewed as a benchmark for small-cap stocks.

Dividend growth investors looking for a small-cap with growth potential should take a closer look at Sonic Corp. (SONC), a member of the Russell 2000 Index. Sonic is a small-cap with growth potential, and an extremely shareholder-friendly management that returns lots of cash through share buybacks and dividends.

Change Of Strategy Fuels Impressive Results

Sonic is a fast food company, and is the largest drive-in restaurant chain. In recent years, the company has fully embraced the franchise model. Approximately 95% of the nearly 3,600 drive-in Sonic locations are franchised. This has helped Sonic grow earnings, as the franchise model allows the company to generate a steady stream of royalties, while placing many of the associated expenses onto the franchisee.

Increased franchising activity has greatly helped Sonic grow earnings at a much faster rate than sales. In the most recent quarter, comparable sales declined 0.2% from the same quarter a year ago. However, adjusted earnings-per-share increased 21% for the quarter. Adjusted earnings also rose 21% over the first three quarters of the current fiscal year. Higher margins from franchised restaurants contributed to Sonic’s growth over the past year, as did tax reform.

Strong results from franchising has fueled Sonic’s restaurant expansion. The company expects to open 50 to 55 new franchised locations this year. Continued growth also allows the company to return massive amounts of cash to shareholders.

Serving Up Dividends & Buybacks

Sonic has a current dividend yield of 1.9%, which is not overly impressive at first glance. However, Sonic is a dividend growth machine. The company initiated its dividend program in November 2014, and its first quarterly payout was $0.09 per share. Since then, the company has grown its dividend to its current level of $0.19 per share, for a compound annual growth rate of 20.5%. At that rate, Sonic’s dividend payout would double every 3.5 years.

Not only is Sonic a dividend growth stock, but the company also returns lots of cash through share repurchases. On August 8th, in addition to announcing a 19% dividend increase, Sonic also declared a new $500 million share repurchase authorization through August 2021. This represents approximately 40% of Sonic’s current market capitalization, meaning the company expects to repurchase 40% of its shares over the next three years. Such a large share buyback can provide a major boost to Sonic’s earnings growth. By reducing its shares outstanding, each remaining share captures a higher portion of a company’s earnings-per-share.

Over the first three quarters of fiscal 2018, Sonic repurchased 9.8% of its shares outstanding. Including dividends, the company will have a total shareholder yield of more than 10%. This is a very high total yield, after accounting for both dividends and share repurchases. Sonic’s high earnings growth and dividend growth make it an attractive small-cap dividend stock.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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Dividend growth investors looking for a small-cap with growth potential should take a closer look at Sonic Corp. (SONC), a member of the Russell 2000 Index.
sonic corp, fast food, dividend, growth
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2018-09-29
Wednesday, 29 August 2018 11:09 AM
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