Must-know: Brinker’s dividend growth of ~20% outperforms peers
Brinker International recently rose dividends by 20%
In August, Brinker International Inc. (EAT), the company that owns Chili’s Grill and Bar, had increased its dividend by a large amount of 20%. This is by far the largest dividend increase compared to companies like McDonald’s Corp. (MCD), Yum! Brands Inc. (YUM), and Darden Restaurants Inc. (DRI). With its current quarterly dividend at $0.55 a share and its stock price of $40.95, however, its dividend yield is just 2.37%. This isn’t as high as McDonald’s or Darden’s, but it’s above Yum! Brand’s 2.05% or the Consumer Discretionary Select Sector SPDR ETF (XLY)’s 1.40%.
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Key points driving Brinker’s outperformance
Unlike other dividend growth trends, dividend growth for Brinker International has been increasing since 2009. This suggests what’s driving Brinker International’s solid performance is factors outside the variables that also affect other food service stocks like McDonald’s, Yum, or Darden.
Key areas of initiatives that contributed to high performance, since laid out by management in 2010, include:
- Focusing on a value menu rather than limited time-off sales (a cheap value-based menu as opposed to occasional discounts and promotions)
- Reducing front-of-house costs with labor scheduling and team-based service, so that guest satisfaction is enhanced and waiter downtime is minimized
- Investing in new cooking technology and kitchen layout optimization to decrease cost
Focusing on value and being a cost leader
Essentially, after seeing increased competition from limited-service shops following the aftermath of the financial crisis, the company strove to become a cost-leader in full-service consumer service. Did this work? Yes, as the chart below shows, Brinker’s growth in dividends over the past few years has been driven primarily by earnings, as its dividend payout ratio stood relatively constant at around ~34%. The company has a 40% payout ratio as a long-term goal.
Fending off competition and gaining market share
This contrasts to Darden Restaurants Inc. (DRI), whose mission is to build brands and create differentiated products. Darden could have been more successful if it only had high-end restaurants that were less sensitive to economic slowdown. But as a mass-market and product differentiation–based (perhaps Olive Garden and Red Lobster aren’t that unique) middle-class restaurant, it’s hard for the company to change course. Much of its effort also focused on promotions and price cuts, with little emphasis on operating efficiency and costs—until now.
Through a low-cost model, it was also able to fend off competition from limited-service restaurants (fast-casual and quick-service types) like Chipotle Mexican Grill Inc. (CMG), Panera Bread Co. (PNRA), the Taco Bell Brand under Yum! Brands Inc. (YUM), and McDonald’s Corp. (MCD).