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  1. Home
  2. / Investing
  3. / Stocks

Restaurant Stocks Still Put on a Good Show, but Rising Costs Could Bite Them

McDonald's decision to raise its dividend is an indicator of the sector's comeback from the pandemic, but higher labor and food costs are a concern.
By JONATHAN HELLER
Sep 24, 2021 | 10:00 AM EDT
Stocks quotes in this article: MCD, CMG, YUM, DPZ, DRI, BBQ, STKS, KURA, FAT, JAX, BFI

We got another sign of a potential return to normality in restaurant land Thursday when McDonald's (MCD) made a couple moves to return more capital to shareholders. First, McDonald's raised its quarterly dividend 7% to $1.38 a share, which equates to a 2.25% yield. Second, the company restarted the $15 billion stock buyback program it suspended in 2020.

In terms of dividends, MCD was an outlier during the pandemic among publicly traded restaurant names as the company did not suspend payments. It has maintained its status as a dividend champion and has raised the dividend at an 7% compound annual growth rate over the past 10 years.

The sector continues to perform well year to date, with a basket of 40-plus restaurant names with market caps in excess of $100 million up an average of 39.5% versus 19.7% for the S&P 500, 15.2% for the Russell 2000 Index and 24.5% for the Russell Microcap Index.

The "Big Five" -- a self-coined group that includes McDonald's (up 16% year to date), Chipotle Mexican Grill (CMG) (up 40%), Yum Brands (YUM) (up 16.5%), Domino's Pizza (DPZ) (up 29%) and Darden Restaurants (DRI) (up 36%) -- are now up an average of 27.5% year to date.

Top performers still include microcaps BBQ Holdings (BBQ) (up 244% year to date), The One Group Hospitality (STKS) (up 203%), Kura Sushi (KURA) (up 131%), FAT Brands (FAT) (up 100%) and J Alexander Holdings (JAX) (up 92%). That's the same list as late July, just in a slightly different order.

The worst performer at present is newcomer BurgerFi International (BFI) (down 34% year to date), which went public last December after it was acquired by special purpose acquisition company Opes Acquisition. BurgerFi is known for using grade A Angus beef in its burgers; it has 118 locations (22 company-owned and 96 franchised) in 22 states by my count. I've got to admit that I am getting hungry as I write this, and I believe there's a BFI location within striking distance, so I will be giving it a try. I'll let the dust settle, however, on the stock at this point.

My concern for the sector remains rising labor and food costs, as I mentioned on Wednesday. There seemingly is still a lot of pent-up demand among consumers to eat outside the home, but I'm not sure what the appetite will be if menu prices continue to rise.

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

TAGS: Dividends | Earnings | Investing | Stocks | Consumer | Restaurants | Real Money | Coronavirus

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