Restaurant stocks have made an incredible comeback in the past year, as the broader economy and the restaurant industry continue to recover from the pandemic. The Invesco Dynamic Leisure and Entertainment ETF (PEJ) has returned over 60% in the past year, and over 20% year-to-date.
For investors expecting the restaurant recovery to continue, the good news is that there are still plenty of high-quality stocks that can provide satisfactory returns. The following 3 restaurant stocks have competitive advantages, future growth potential and pay above-market dividend yields.
Restaurant Stock No. 1: Darden Restaurants (DRI)
Darden is a restaurant conglomerate with a variety of brands including Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, and Eddie V’s. It has over 1,700 restaurants in all.
The company recently concluded its full fiscal year, with strong results across the board. Revenue increased 80% to $2.3 billion, due to higher comparable sales as well as new restaurant openings.
Darden has been one of the biggest beneficiaries of the reopening of restaurants across the country, as it operates casual sit-down restaurants that were closed during the pandemic. The company has returned to profitability as a result, with adjusted earnings-per-share of $4.77 for the fiscal year, compared with a loss of $0.43 per share in fiscal 2020.
As a reflection of the company’s improving fundamentals, Darden has meaningfully increased its cash returns. The company recently raised its dividend by 25% to $1.10 per share, resulting in a solid 3% yield at the current share price.
Restaurant Stock No. 2: Yum! Brands (YUM)
YUM is a fast-food giant, with its three core brands Taco Bell, Pizza Hut, and KFC. In all, the company has over 50,000 restaurants around the world. YUM’s fast-food business model makes it a recession-proof stock.
Last year, the company performed much better than the industry, with a relatively mild 3% decline in total sales. It has also enjoyed the strong recovery over the course of 2021, with constant-currency sales growth of 26% in the most recent quarter.
YUM saw broad-based growth with KFC at 35%, Taco Bell at 24% and Pizza Hut at 10%. Adjusted earnings-per-share increased 41% for the period.
YUM increased its restaurant unit count by 2% last quarter, and due to the company’s strong results to begin 2021, it has reinstated its long-term growth objective of 4%-5% annual unit growth.
With global scale and a recession-resistant business model, YUM generates enough cash flow to invest in growth, and return cash to shareholders. For example, in May the company announced a new $2 billion share repurchase, while the stock has a 1.5% yield.
Restaurant Stock No. 3: Jack in the Box (JACK)
Jack in the Box is a fast-food restaurant with more than 2,200 restaurants in 21 states and Guam. Like YUM, its fast-food business model insulates the company from recessions, such as the coronavirus pandemic last year. Even in a very challenging year for the restaurant industry in 2020, Jack in the Box posted resilient sales and profits, and the company has continued to grow in 2021.
Third quarter diluted earnings per share rose 26% year-over-year, as total revenue increased 11% due to 10% growth in same-store sales (this measures growth at restaurants open at least one year). Adjusted EBITDA was $79 million for the 2021 third quarter, while Jack in the Box generated a restaurant-level margin of 26% implying strong profitability.
Jack in the Box is another shareholder-friendly company that returns a high level of cash to shareholders. The company utilized $65 million for share buybacks in the 2021 third quarter, and has $70 million remaining on its share repurchase authorization. The stock also pays a dividend which currently yields 1.7%.
The restaurant industry continues its steady recovery, as more restaurants reopen across the country. Assuming the economic recovery continues, investors can still buy high-quality restaurant stocks at reasonable valuations. Darden, Yum! Brands, and Jack in the Box are all growing their sales and profits, and rewarding shareholders with rising share prices and dividends.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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