The restaurant industry is feeling the heat from high levels of inflation. Although inflation fell for the second consecutive month in August, it remains very high. The Consumer Price Index increased to 8.3% in August 2022 year over year. Following the release of inflation figures, market experts are now expecting an interest rate hike of 75 basis points later this month by the Federal Reserve.
The restaurant sector has also been facing a drop in traffic for some time now. Inflation made the scenario worse. High inflation leads to higher menu prices, which in turn has hurt traffic. Restaurant owners are struggling with the high cost of operations. Intense competition, high wages and food price inflation remain concerns. The industry is constantly incurring increased expenses, which have recently affected margins.
Additionally, rising pre-opening costs, marketing expenses and costs related to sales-enhancing initiatives are weighing on industry margins. Rising costs for meat and seafood, including ribs, prime rib, rib eye and tri-tip, and salmon, are hurting the industry.
In the current circumstances, as might be expected, defensive stocks have captured the attention of investors. These actions can help shore up hard-earned profits in tough market conditions. Plus, they offer significantly higher dividend yields.
Actions like McDonald’s Corporation (MCD – free report), Yum! Marks, Inc. (YUM – free report), Jack in the Box Inc. (JACK – free report) and Ruth’s Hospitality Group, Inc. (RUTH – Free Report), which regularly pay dividends, could bring you promising returns.
4 restaurant stocks to watch
With the help of the Zacks Stock Screener, we’ve selected four restaurant stocks that have a Zacks #2 (Buy) or 3 (Hold) rank with a dividend yield of 2% or greater and a historic dividend growth of five. years greater than or equal to 2%. Additionally, the payout ratio for these stocks is less than 60, reflecting ample leeway for future dividend increases. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.
McDonald’s: The company’s focus on menu innovation and loyalty program expansion is commendable. The company is also making every effort to stimulate growth in international markets. Robust digitization will help the business drive long-term growth and capture market share.
McDonald’s has an estimated long-term earnings growth rate of 8.4%. This No. 3 Zacks company pays a quarterly dividend of $1.38 ($5.52 annualized) per share, yielding a 2.2% yield at the current share price. MCD’s payout ratio is 56, with a five-year dividend growth rate of 8%. (See MCD’s dividend history here)
Yum! Brands: The company benefited from its continued focus on offsite channels, strategic investments in digital technology and refranchising efforts. Additionally, he implemented various digital features across mobile and online platforms across all brand segments to enhance customer experience.
Yum! Brands has an estimated long-term earnings growth rate of 11.9%. This Tier 3 Zacks company pays a quarterly dividend of 57 cents ($2.28 annualized) per share, yielding a 2% yield at the current share price. YUM’s payout ratio is 53, with a five-year dividend growth rate of 13%. (See YUM’s dividend history here)
Jack in the box: The focus on initiatives such as menu innovations, delivery channels and marketing strategies bodes well for Jack in the Box. It invests aggressively in store improvements and new store construction and innovates through digital operations.
Jack in the Box has an estimated long-term earnings growth rate of 17%. This Tier 3 Zacks company pays a quarterly dividend of 44 cents ($1.76 annualized) per share, yielding a yield of 2.1% at the current share price. The JACK payout ratio is 28, with a five-year dividend growth rate of 2.2%. (See JACK’s dividend history here)
Ruth’s Home Group: The company reported strong restaurant sales and franchise revenue. Strong comparable sales are also helping Ruth’s Hospitality Group.
Ruth’s Hospitality Group has an estimated earnings growth rate for 2022 and 2023 of 24.8% and 11.2%, respectively. This Tier 2 Zacks company pays a quarterly dividend of 14 cents (56 cents annualized) per share, yielding a yield of 3.1% at the current share price. RUTH’s payout ratio is 43, with a five-year dividend growth rate of 7.6%. (See RUTH’s dividend history here)