Adding EAT to my Watchlist

18 Feb 2018 18:45

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Brinker International (EAT)
Share Price: $32.88
Yield: 4.62%
P/E: 11.88

Brinker (EAT) is the owner of restaurant chains Chili’s and Maggiano’s Little Italy. EAT has had a tough time with stagnate sales over the last 3 years at its largest franchise Chili’s but the bleeding is finally starting to slow thanks to an improved (simpler) menu and an increase to advertising. Additionally the simpler menu should reduce costs and increase service times which is a welcome improvement for not just company owned restaurants but also franchisees.

The bright spot is their new franchise Maggiano’s which last reported an increase in sales but with just 52 restaurants it is not enough to compensate for Chili’s. One limiting growth factor to Maggiano’s is that it serves a higher end class of eating which EAT refers to as “polished casual”. Unfortunately, this higher end market is limited to locations near high wage earning affluent major cities.

EAT pays a generous 4.62% dividend that is well covered with a payout ratio to earnings of 55% and significant free cash flow. The dividend has 13 straight years of dividend increases with its most recent increase of 11.76% and a 10 year average of 12.33%.

One knock against EAT has been the accumulation of debt which is starting to weigh on financials as annual interest expense jumped from $33M to $50M or an increase of 52%.

Overall EAT is far from a growth story but sales are stabilizing and should start to increase revenue in the low single digits. The current dividend is well funded and even has room to grow. From a financial perspective, EAT would be smart to stop share buybacks, cap future dividend growth to 8% and use the surplus cash to pay down long term debt to reduce annual interest expenses. It is be hard to ignore a stock with a yield that exceeds 4.5% and has potential to reasonably grow dividends 5-8% annually. Though I do not own any shares it is a stock I am considering to buy with my next transaction if prices stay below $34/share.

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