A Tasty Combination of Growth and Yield
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Each morning I read the CNBC Morning Brief to get a short synopsis of what to expect in the market that day. About a week ago something caught my eye about a company that many people know. Brinker International (NYSE: EAT) announced they would raise their quarterly dividend by 25%, and also announced an additional $500 million in share buybacks. Brinker International is the parent company of the popular Chili's Grill & Bar, and also owns Maggiano's Little Italy restaurants. While other restaurants have created additional concepts, Brinker has expanded its primary chain through additional locations and additional menu options. Though many people might expect a large dividend increase and share buyback to indicate the company has saturated its market, there's a lot more to this company's future than meets the eye.
To say that there's competition in the dining segment would be a vast understatement. In the last several years, chains such as Chipotle Mexican Grill (NYSE: CMG) have burst on the scene offering what is now referred to as “fast casual” dining. Brinker International also must compete with more traditional sit down restaurants like Red Lobster, Olive Garden, and Longhorn Steakhouse, which are owned by Darden Restaurants (NYSE: DRI). While each of these restaurants offers a different type of food and value to their customer, Brinker has managed to keep its Chili's chain not only relevant but growing. In fact, looking at the company’s last earnings report, we get a sense of the company's momentum and cash generating capabilities.
In Brinker's last quarter, the company reported EPS up 27.1%, driven by positive comparable sales at both Chili's and Maggiano's. In fact, this was the fifth consecutive increase at Chili's, and the tenth consecutive increase at Maggiano's in same-store sales. Though these results are impressive on their own, what is truly outstanding is the company's cash flow. In the most recent quarter, the company generated nearly $180 million in free cash flow and based on their new dividend would have paid out just $15 million. In addition, the company has reduced its diluted share count by 9.57% over the last year. This significant commitment to retiring shares and the seemingly new commitment to increasing the dividend both should be positive catalysts for the stock going forward.
When it comes to the company's dividend policy, investors should notice what seems to be a change over the last few years. From 2007 until 2010 the company maintained a quarterly dividend of $.11. In June of 2010, the company increased the dividend to $.14, and in September of 2011, and now 2012 the company further increased the dividend to $.16 and $.20 per quarter respectively. It seems reasonable that investors should expect a standard dividend increase in September of each year going forward. In the last quarter, the company would have paid out less than 10% of its free cash flow based on its new dividend payout. This gives me reason to believe investors should expect significant dividend increases in the future. What is equally impressive is the current combination of expected earnings growth and yield from the company.
Analysts are calling for earnings growth of 13.4% from Brinker over the next several years. With a current yield of about 2.3%, this gives investors not only good current income, but the chance at capital gains and dividend increases as well. While some people might look at Darden Restaurants and their over 3.8% yield as a better alternative, there is a huge difference in the free cash flow generation between the two companies. Brinker actually generates almost as much free cash flow per $1 of sales as Chipotle, which is a leader in the restaurant business in operating efficiency. Brinker recently generated $.12 of free cash flow for each $1 of sales. Darden generates just one fourth of this free cash flow. If you are a growth investor and willing to take the risk, Chipotle could be an attractive play as the company generates significant free cash flow, and is growing significantly faster than either Brinker or Darden. However, the difference between investing in Brinker and investing in Chipotle is the market's expectation of Brinker seems much more muted and likely to bring positive surprises. In addition, investors in Brinker will likely see significant income growth, while investors in Chipotle will have to hope for capital gains. As you can see, Brinker offers investors a tasty combination of growth and income.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill and Darden Restaurants. Motley Fool newsletter services recommend Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.