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  1. Home
  2. / Investing
  3. / Stocks

Closed Doors Cause Restaurants to Take Dividends, Buybacks Off Menu

The impact of the coronavirus on the cash flow of companies in the restaurant sector is leading to capital-saving moves by several notable names.
By JONATHAN HELLER
Mar 27, 2020 | 10:00 AM EDT
Stocks quotes in this article: CBRL, BLMN, DRI, TXRH, MCD, WEN, DIN, EAT, CAKE, RUTH

On Wednesday, Cracker Barrel Old Country Store (CBRL) made a move that I expect we'll see more of, unless life gets back to normal in the near term, which is unlikely. The casual dining name suspended its regular dividend and deferred its most recently declared payout in order to conserve cash. Cracker Barrel joined others in the sector that already made that move, including Bloomin' Brands (BLMN) , Darden Restaurants (DRI) and Texas Roadhouse (TXRH) .

Others, including McDonald's (MCD) , Wendy's (WEN) and Cracker Barrel, have suspended their stock buyback programs, which may be more of a political move given the disdain some have expressed toward companies buying back stock amid bailouts and the discretionary nature of buybacks in general.

I expect we'll see additional capital-saving moves moving forward in this at-risk sector, where margins are generally thin and it's a fine line between success and failure. Indeed, I'm not sure how the landscape will look once customers are allowed back in.

Current high-yielders to keep an eye on for potential dividend suspensions include Dine Brands Global (DIN) (10.2% yield), Brinker International (EAT) (9.8%), Cheesecake Factory (CAKE) (7.6%) and Ruth's Hospitality Group (RUTH) (8.3%).

The publicly traded landscape was already crowded before, with some names struggling and at risk even in what had been a solid economic environment. Close the doors except to take-out orders and the situation just got a whole lot worse.

Historically, restaurants have been one of the best-performing sectors following the end of a recession because demand picks up once consumers are more confident and apt to eat outside the home. Typically, the supply of restaurants falls during a recession and as demand ramps up, profits soar, and the industry expands supply.

The issue now is not a demand problem, as is typical in a recession. Rather, it's a supply problem. Restaurants simply are not open for regular business, and I'm not sure how much slack take-out business will provide for those that are typically sit-down venues.

You've got to wonder once restaurants do reopen how quickly patrons will come back. I say this for couple reasons. The first is whether there will be a fear among customers to eat a meal in a roomful of people after they've been confined to their homes because of a disease that is spread in close quarters. Second, depending on how long employment is compromised due to the country shutting down, consumers may not be willing or able to spend as they did pre-virus, at least for a while.

As a postscript, Cheesecake Factory sent a letter to its landlords last week stating that it will be unable to make April rent payments. There may be more of this to follow.

This essentially is the perfect storm for restaurant stocks, and I'm not sure of the ramifications that bailouts will have for the sector.

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At the time of publication, Heller had no positions in the stocks mentioned.

TAGS: Dividends | Investing | Stocks | Consumer | Food & Drink | Restaurants | Coronavirus

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