3 Restaurant Stocks for the Economic Reopening Trade

Dividend Stocks

The U.S. economy is back in growth mode and unemployment is falling despite the lingering threat of the Delta variant. This bodes well for the nation’s restaurant stocks, which were hit especially hard by the pandemic.

Restaurant stocks have notched impressive returns in the past several months and are primed for further growth as the economy recovers. Many eateries are also appealing for their market-beating dividend yields and high dividend growth rates.

While many restaurant stocks will continue to be cyclical due to the underlying economic conditions, fast food chains are highly resistant to recessions. My three picks today represent quality companies with durable competitive advantages that reward shareholders with market-beating dividend yields:

  • McDonald’s (NYSE:MCD)
  • Restaurant Brands International (NYSE:QSR)
  • Darden Restaurants (NYSE:DRI)

Restaurant Stocks: McDonald’s (MCD)

MCD Stock: a McDonald's sign and logo on the side of a building

Source: 8th.creator / Shutterstock.com

McDonald’s is one of the best stocks for investors who want consistent dividend growth each year without exception. It is the only restaurant stock on the list of Dividend Aristocrats, an exclusive group of 65 stocks in the S&P 500 Index that have raised their dividends for more than 25 years in a row. In McDonald’s case, the company has increased its dividend for more than 40 consecutive years.

Normally, restaurants are highly cyclical. But McDonald’s dominance in the fast food category makes it virtually immune to recessions. This is because many consumers actually visit McDonald’s more and curtail spending at more expensive restaurants when the economy deteriorates.

Indeed, the company performed relatively well in 2020. In a year when restaurant stocks saw their profits turn to losses and their share prices crash, McDonald’s was once again a pillar of stability. The company remained highly profitable and raised its dividend. This year, it has participated in the economic recovery with impressive growth.

In the second quarter of 2021, McDonald’s reported 40.5% growth in global comparable sales. This is a key metric for restaurants that shows growth at locations open at least one year. Even on a two-year rolling basis, McDonald’s comparable sales have grown from 2019, meaning the company is actually stronger than it was before the pandemic.

Further growth is very likely for McDonald’s as the company expands its digital platform. In the first half of 2021, McDonald’s generated nearly $8 billion in digital sales in its top six markets, representing 70% growth from the same six-month period last year.

The only problem with MCD stock is that shares appear overvalued with a 2021 price-to-earnings (P/E) ratio of nearly 30. This could limit future shareholder returns if the valuation multiple declines. But the stock has a dividend yield of 2.2%. That’s higher than the S&P 500’s average yield of 2%. As a result, MCD stock is a sure bet for dividends that steadily increase each year, even during recessions.

Restaurant Brands International (QSR)

a burger king fast food restaurant

Source: Savvapanf Photo / Shutterstock.com

Restaurant Brands International may not be a household name, but many of its brands are household favorites. The company operates more than 27,000 restaurants and owns Burger King, Tim Horton’s and Popeye’s Louisiana Kitchen. These three high-profile fast food chains are all leaders in their respective category, with Popeye’s as a standout performer.

Restaurant Brands International has generated impressive growth to start 2021. In the most recent quarter, revenue increased nearly 32% year-over-year. Its adjusted earnings-per-share (EPS) of 77 cents was more than double its EPS from the same quarter last year.

Like McDonald’s, Restaurant Brands International has now exceeded its pre-pandemic sales totals. Its global comparable sales are up 4% on a two-year basis from the same quarter in 2019.

New restaurant openings are the primary growth catalyst for the company, as it believes it has under-penetrated its core markets. For example, Restaurant Brands International has opened 378 net new restaurants in the first half of 2021. The company also has big expectations for the years to come. Over time, management sees the potential for 40,000 restaurants globally.

In the meantime, Restaurant Brands International appeals to income investors with a 3% dividend and steady dividend growth.

Restaurant Stocks: Darden Restaurants (DRI)

olive garden (dri) sign on front of building

Source: Sundry Photography / Shutterstock.com

Our final pick is Darden Restaurants, which differs from the first two picks in that it is not a fast food operator. Instead, Darden is a casual dining establishment with brands such as Olive Garden, LongHorn Steakhouse and Yard House. It has more than 1,800 restaurants in the U.S. and Canada.

Darden was one of the hardest-hit restaurant companies last year when the Covid-19 pandemic forced closures across the nation. And while fast food companies can rely heavily on drive-through visitors, casual restaurants are more dependent on in-store traffic.

Fortunately, Darden has started off 2021 with a return to impressive growth. Shareholders have been rewarded with strong dividend growth in the past few quarters. The company recently concluded its fiscal year. Total sales increased nearly 80% for the year while same-restaurant sales increased 90%.

Like its fast food rivals, Darden has generated impressive two-year growth. In the fiscal 2021 fourth quarter, segment sales at LongHorn Steakhouse grew 18% from the comparable quarter in fiscal 2019. Segment profit margin increased for most brands in the two-year period.

Adjusted diluted net EPS came to $2.03 for the full fiscal year, reversing a steep loss from the prior year. The return to profitability also allowed Darden to resume paying dividends to shareholders after suspending payouts during the pandemic. The company has resumed strong dividend growth in the past year.

Prior to the pandemic, Darden had paid a quarterly dividend of 88 cents per share as recently as January 2020. But the company suspended its dividend afterwards, then reinstated the dividend payout in October 2020 at a rate of 30 cents per share. The company has since raised the dividend every quarter to its current rate of $1.10 per share. The quarterly dividend payout is now 25% higher than it was pre-pandemic and Darden shares yield 3%.

On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. 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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