Updated on July 30th, 2021 by Bob Ciura
The past year has been extremely challenging for the U.S. restaurant industry. The coronavirus pandemic caused nationwide closures, which caused restaurant sales and profits to plummet.
Fortunately, 2021 has been a year of recovery, both for the broader U.S. economy and the restaurant industry in particular. As the economy reopens, traffic has returned, which has led to a huge recovery in the sales (and share prices) of the major restaurant stocks.
Even better, many restaurant stocks are back to paying dividends to shareholders, after many had suspended their shareholder payouts during the pandemic.
With this in mind, we have created a list of approximately 100 publicly-traded restaurant stocks, many of which could generate solid returns to shareholders as business conditions normalize.
You can download a free Excel spreadsheet of our list of ~100 restaurant stocks (with metrics that matter like dividend yields and payout ratios) by clicking the link below:
This article will discuss our top 7 restaurant stocks. All 7 restaurant stocks pay dividends to shareholders, have strong brands in the industry, and long-term growth potential. Listed below are our seven favorite restaurant stocks today.
Table of Contents
We have ranked our top seven restaurant stocks, according to annual expected returns over the next five years. These restaurant stocks are ranked in order of expected returns, from lowest to highest. You can use the following links to instantly jump to any specific stock:
- McDonald’s Corporation (MCD)
- Cracker Barrel Old Country Store (CBRL)
- Restaurant Brands International (QSR)
- Wendy’s Company (WEN)
- Darden Restaurants (DRI)
- Yum! Brands (YUM)
- Jack in the Box (JACK)
Restaurant Stock #7: McDonald’s Corporation (MCD)
McDonald’s is arguably the most highly-regarded by dividend growth investors among the restaurant stocks, because of its tremendous dividend history. McDonald’s has raised its dividend for 44 consecutive years since paying its first dividend in 1976. This places it on the Dividend Aristocrats list, a group of stocks in the S&P 500 with 25+ consecutive years of dividend increases.
You can download an Excel spreadsheet of all 65 Dividend Aristocrats (with metrics that matter) by clicking the link below:
McDonald’s is the world’s leading global foodservice company with more than 38,000 restaurants in more than 100 countries. Approximately 93% of restaurants worldwide are owned and operated by independent franchisees.
The company has three main business segments: the U.S. market, where the company has more than 14,000 stores, International Operated Markets, which includes developed markets France, the U.K, Canada and Australia, International Developed Licensee, which includes high-growth markets such as China, Italy and Russia.
McDonald’s recently reported second-quarter results in which global comparable sales increased 40.5% from the second quarter of 2020. Global comparable sales are up 7% on a two-year basis, meaning McDonald’s sales are well above their pre-pandemic levels.
McDonald’s has invested heavily in its Experience of the Future concept in recent years. This has involved remodeling of stores on a massive scale.
McDonald’s added DoorDash and GrubHub (GRUB) as delivery partners in late 2020 to go along with its existing relationship with Uber (UBER). Nearly 25,000 McDonald’s around the world, about two-thirds of worldwide restaurants, now offer delivery. This endeavor has paid off as delivery sales have quadrupled to $4 billion in just three years.
With a 2021 P/E of nearly 30, McDonald’s stock appears overvalued. Our fair value estimate for the stock is a P/E ratio of 20. This means that even with expected EPS growth of 6% and the 2.1% dividend yield, shares are expected to return less than 1% per year over the next five years. McDonald’s is a solid holding for dividend growth investors, but now is not a great time to buy the stock due to its high valuation.
Restaurant Stock #6: Cracker Barrel Old Country Store Inc (CBRL)
Cracker Barrel Old Country Store pays homage to America’s heritage in both its menu options and atmosphere. Some of the more popular menu items include meatloaf, grits and signature biscuits. Cracker Barrel locations also operate a gift store inside of its locations. The company has more than 660 locations in 45 states.
Cracker Barrel has outperformed the rest of the casual dining industry over the past few years. While sales for the restaurant industry have remained essentially flat since 2012, Cracker Barrel’s sales have increased at a high rate over this period of time. And while Cracker Barrel took a step back last year, the company has returned to strong growth in 2021.
On 05/25/21, Cracker Barrel reported financial results for the third quarter of fiscal 2021. Comparable store restaurant sales decreased by 8.6%. Additionally, comparable store retail sales increased by 10.8%, reflecting sales improvements as compared to the prior quarter primarily due to reopening of dining rooms and strategic sales initiative.
Adjusted earnings per diluted share came in at $1.51. Meanwhile, total revenue this quarter was at $713.42 million, up 64.9% year–over–year.
The company is expected to grow earnings-per-share at an annual rate of ~3% for the next five years and shares sport a dividend yield of 2.9%. In total, we expect Cracker Barrel to offer a total annual return of 5.6% through 2026. The stock is a hold for its solid dividend yield and growth potential, although it is not undervalued right now.
Restaurant Stock #5: Restaurant Brands International (QSR)
Restaurant Brands International is one of the world’s largest owner–operators of quick service restaurants (hence its stock ticker QSR). The company was founded in 2014 by the $12.5 billion merger between American fast food restaurant chain Burger King and Canadian coffee shop and restaurant Tim Horton’s.
Later, Restaurant Brands International expanded its franchise portfolio with the 2017 acquisition of American fast food chain Popeye’s Louisiana Kitchen. Restaurant Brands International has approximately 5,000 Tim Horton’s, 19,000 Burger King, and 3,500 Popeye’s Louisiana Kitchen restaurants.
On July 30th, the company posted better-than-expected results. Revenue of $1.44 billion increased 37% year-over-year, while adjusted earnings-per-share of $0.77 more than doubled from the same quarter last year. Global comparable sales rose 4% on a two-year basis from the same quarter in 2019, reflecting that the company has surpassed its pre-pandemic sales.
Restaurant Brands International has opened 378 net new restaurants in the first half of 2021. New restaurant openings are a major component of QSR’s growth plan.
Source: Investor Presentation
Expanding its digital capabilities is another growth catalyst. Restaurant Brands International is trying to maximize the potential of its stores via drive–thru, take–out and delivery options. It will install digital menu boards in more than 10,000 drive–thru points in the U.S. and Canada by mid–2022.
The company more than doubled its digital sales in North America in 2020. Digital sales in home markets increased 60% last quarter, year-over-year.
Shares appear somewhat overvalued, with a 2021 P/E ratio above 24 compared with our fair value estimate of 18. Annual EPS growth (10%) and dividends (3.0%) can offset the impact of overvaluation. With projected returns of 7.3%, QSR stock is a solid hold for income investors.
Restaurant Stock #4: Wendy’s Company (WEN)
Wendy’s is the third-largest hamburger quick-service restaurant chain in the world, with more than 6,700 restaurant locations globally and a market capitalization of $5 billion. More than 90% of the company’s locations are in the United States.
On May 12th, Wendy’s reported first quarter 2021 results. Like its rivals, Wendy’s has benefited from accelerating sales in 2021.
Source: Investor Presentation
The company’s global sales growth increased by 12.5% in the first quarter compared to growth of 1% in the same period last year. Global same–restaurant sales growth of 12% compared favorably to the 0.2% decline in 2020. Systemwide sales of $2.95 billion was 13% higher than $2.61 billion earned in 1Q2020.
Out of the 38 total new restaurant openings in the first quarter, the company had 10 net new restaurants. The global re-imaging of Wendy’s was reported to be 66% complete as of 1Q2021, in comparison to 60% one year ago.
Wendy’s continues to return lots of cash to shareholders. The company announced an 11% increase to the quarterly dividend to 10 cents, as they near their way back to their 2019 dividend level. Shares currently yield 1.7%.
The company also repurchased 2.8 million shares in the quarter for $56 million, and increased their share repurchase authorization by $50 million which expires in February 2022.
Wendy’s stock trades for a 2021 price-to-earnings ratio of 32. Our fair value estimate is a P/E ratio of 29.5. The combination of 7% annual EPS growth, and the current dividend yield of 1.7% will more than offset the impact of a declining P/E multiple, resulting in total returns of 7.5% per year through 2025. Wendy’s earns a hold recommendation for its decent projected returns.
Restaurant Stock #3: Darden Restaurants (DRI)
Darden Restaurants Inc. is a restaurant company with a portfolio of brands including Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, and Eddie V’s. The company ended its fiscal year with over 1,700 restaurants in the United States and Canada, the vast majority of which are company-owned.
On June 24, 2021, Darden Restaurants reported fourth–quarter and full–year results for Fiscal Year(FY)2021, ending on May 30. Total sales of $2.3 billion increased ~80%, driven by a blended same–restaurant sales increase of 90% and 30 net new restaurants.
Source: Investor Presentation
For the twelve months of FY2021, net earnings were up to $629.3 million. On a per–share basis, the Company made $2.78 per share for the quarter and $4.77 per share for the full year, up from $(3.86) per share and $(0.43) per share compared to last year, respectively.
The company also increased the quarterly dividend to $1.10 per share from $0.88 per share. This represents an increase of 25%.
We maintain our expected EPS growth rate of 8% over the next five years due to the strength in its core segments. Along with the 3% dividend yield and a small headwind from a declining P/E multiple, we expect total returns of 7.8% per year over the next five years. DRI is a hold for income investors.
Restaurant Stock #2: Yum! Brands (YUM)
Yum! Brands is a fast-food company that operates KFC, Pizza Hut, Taco Bell, and The Habit Burger Grill restaurants globally. At the end of 2020, the company had 25,000 KFC units worldwide, nearly 18,000 Pizza Huts, 7,400 Taco Bells, and close to 300 The Habit Burger Grills in operation in 150 countries and territories.
Yum! Brands operates a franchise model that has helped it expand quickly, and with a capital-light business model, which also helps it achieve very strong profit margins.
Source: Investor Infographic
The strength of Yum!’s brands and their appeal to consumers constitute a significant competitive advantage, as does its massive footprint with over 50,000 restaurants.
Yum! Brands has returned to strong growth rates this year, thanks to the growth of its store count and its same-store sales. In the 2021 second quarter, worldwide system sales excluding foreign currency translation grew 26%, with 23% same-store sales and 2% unit growth. Adjusted EPS excluding was $1.16, an increase of 41% year-over-year.
Share repurchases will boost earnings-per-share growth. On May 10th, Yum! Brands approved a new $2 billion share repurchase through the end of 2022. This represents more than 5% of the company’s current market cap. Thanks to the strong business momentum, we expect the company to grow its earnings-per-share at a 12.0% average annual rate over the next five years.
We expect Yum! Brands to generate earnings-per-share of $4.50 for 2021. Based on this, the stock is presently trading at a price-to-earnings ratio (P/E) of 29.2. Our fair value estimate is a P/E of 24.2, which represents the 10-year average valuation multiple.
However, when combined with the 12.0% expected EPS growth rate and the 1.5% dividend yield, this implies the potential for 9.4% total annual returns over the next five years.
Restaurant Stock #1: Jack in the Box (JACK)
Jack in the Box is a fast-food chain that operates and franchises hamburger chains in the U.S., with more than 2,200 restaurants in 21 states and Guam. It has a market capitalization above $2 billion. Jack in the Box previously owned the Qdoba brand, but sold it to Apollo Global Management in 2018 to focus on its core brand. Still, the company has a strong U.S. footprint.
Source: Investor Presentation
In mid–May, Jack in the Box reported (5/12/21) financial results for the second quarter of fiscal 2021 (ending 9/30/21). Restaurant traffic declined –5.4% over last year’s quarter due to COVID–driven dine–in restrictions. However, the average check grew 19.9% and resulted in 14.5% same–store sales growth.
Thanks to this impressive growth, adjusted earnings–per–share more than tripled, from $0.50 to $1.58, and exceeded analysts’ consensus by $0.19. The outstanding performance resulted from the popularity of the all–day menu, many menu innovations, stimulus checks as well as the low comparison base of last year’s quarter due to the pandemic. Management also raised the dividend 10%.
The performance of Jack in the Box is impressive and can be attributed, at least in part, to its affordable menu and the appointment of a new CEO, who has put the company back to its growth trajectory, after three years of stagnation. Thanks to the business momentum, we have raised our earnings–per–share forecast for fiscal 2021 from $6.20 to $7.20.
Jack in the Box has repurchased its shares at an aggressive pace in the last five years. During this period, it has reduced its share count by 36%. Share repurchases will be a major component of future EPS growth. During the last decade, the company has grown its EPS at a 5.9% average annual rate.
We expect the company to grow EPS by 9.0% per year on average over the next five years. Jack in the Box is expected to earn $7.20 this year, giving the stock a price-to-earnings ratio of 15.1, which is lower than its 10-year average of 20. If the stock trades up to our target valuation of 18x earnings, shares would generate a ~3.3% annual return.
Expected EPS growth of 9% and the 1.6% dividend yield would further boost returns, leading to total expected returns of 13.9% per year over the next five years. Such a high rate of return makes JACK our top pick among restaurant stocks.
The coronavirus upended life in much of the U.S. in 2020, but restaurant stocks have notched a huge recovery over the course of 2021. As the economy recovers and restaurants reopen, the entire industry is getting a lift. A continued recovery appears likely for restaurant stocks for the remainder of 2021 and beyond.
Longer-term, we see the restaurant industry as strong. The 7 restaurant stocks in this article all pay dividends, and should continue to raise their dividends going forward. Not all are attractive buys right now, but Jack in the Box, Yum! Brands and Darden are our top 3 restaurant stocks right now.