Cracker Barrel's 4% Yield Is Too Tasty To Pass Up

Sep. 4.14 | About: Cracker Barrel (CBRL)

Summary

CBRL has had some operational issues with traffic recently, but I believe its issues are transitory.

The company is cheap on an earnings basis, and I believe expectations going forward are reasonable.

CBRL's 4% yield is the reason I like this stock as it will likely become a tremendous dividend growth story in the future.

Shares of Cracker Barrel (NASDAQ:CBRL) have performed quite well over the long term. Holders of the stock have seen steady growth in their shares and, more recently, an enormous dividend. However, shares have stagnated in the past year or so and have fallen off of their highs to trade flat in recent months. But given CBRL's outlook, are shares a buy around $100? In this article, we'll take a look at CBRL to see if it is worth a look for your dividend portfolio.

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To do this I'll use a DCF-type model that you can read more about here. The model uses inputs such as earnings estimates, which I've borrowed from Yahoo, dividends, which I've estimated at 8% growth annually, and a discount rate, which I've set at the 10-Year Treasury rate plus a 6.5% risk premium.

2013

2014

2015

2016

2017

2018

2019

Earnings Forecast

Prior Year earnings per share

$4.97

$5.58

$6.13

$6.73

$7.40

$8.12

x(1+Forecasted earnings growth)

12.30%

9.90%

9.80%

9.80%

9.80%

9.80%

=Forecasted earnings per share

$5.58

$6.13

$6.73

$7.40

$8.12

$8.92

Equity Book Value Forecasts

Equity book value at beginning of year

$20.45

$22.03

$23.85

$25.91

$28.27

$30.95

Earnings per share

$5.58

$6.13

$6.73

$7.40

$8.12

$8.92

-Dividends per share

$4.00

$4.32

$4.67

$5.04

$5.44

$5.88

=Equity book value at EOY

$20.45

$22.03

$23.85

$25.91

$28.27

$30.95

$33.99

Abnormal earnings

Equity book value at begin of year

$20.45

$22.03

$23.85

$25.91

$28.27

$30.95

x Equity cost of capital

8.90%

8.90%

8.90%

8.90%

8.90%

8.90%

8.90%

=Normal earnings

$1.82

$1.96

$2.12

$2.31

$2.52

$2.75

Forecasted EPS

$5.58

$6.13

$6.73

$7.40

$8.12

$8.92

-Normal earnings

$1.82

$1.96

$2.12

$2.31

$2.52

$2.75

=Abnormal earnings

$3.76

$4.17

$4.61

$5.09

$5.60

$6.16

Valuation

Future abnormal earnings

$3.76

$4.17

$4.61

$5.09

$5.60

$6.16

x discount factor(0.089)

0.918

0.843

0.774

0.711

0.653

0.600

=Abnormal earnings disc to present

$3.45

$3.52

$3.57

$3.62

$3.66

$3.69

Abnormal earnings in year +6

$6.16

Assumed long-term growth rate

3.00%

Value of terminal year

$104.42

Estimated share price

Sum of discounted AE over horizon

$17.82

+PV of terminal year AE

$62.61

=PV of all AE

$80.43

+Current equity book value

$20.45

=Estimated current share price

$100.88

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The model is showing a current fair value for CBRL shares of a little less than $101, which is right in line with where shares trade as I write this. So does that mean CBRL is a buy or a sell?

To answer this, we first need to understand what we're looking at. The model produces a fair value for shares today as opposed to a price target. A price target is some price out in the future that is derived from estimating EPS and then projecting an earnings multiple onto that EPS estimate. The model is saying that the present value of CBRL's discounted future earnings stream, adjusted for dividends, is around $101. This would imply that CBRL shares are fairly valued given the expectations I described above. So what does that mean?

If we take a look at the earnings estimate line in the model we can see that analysts are expecting around 10% EPS growth for CBRL in the coming years. This is a nice clip at which to grow earnings, but understand that this is below CBRL's historical EPS growth rate. In addition, for a company with the fundamentals of CBRL, it is very achievable. In anecdotal terms, when I drive past a CBRL or try to visit one, it's usually quite difficult to get a table or even a parking space. People like CBRL's food and are willing to wait for a table to get it. And as a consumer, the only gripe I have ever had about CBRL is that it is so hard to get a table unless you're there in the middle of the day. The food is good and is reasonably priced and is served with a Southern charm that fits the restaurant's character.

CBRL has had some trouble maintaining its traffic levels in recent quarters but average tickets have risen to keep same store revenue roughly flat. All restaurants go through periods of cyclicality and while time will tell, I think CBRL is just hitting a rough patch. The chain has some intangibles that people really enjoy and I think that if some consumers have left, they will come back and give CBRL another try.

CBRL is pretty cheap on an earnings basis and I like the company's business model, but the real reason I'm excited about CBRL is its massive dividend. The company began to ramp its meager dividend a few years ago and in the past couple of years alone, has doubled its payout. Shares now pay out $1 per quarter, good for a 4% yield at today's prices. This is a huge yield and puts many dividend aristocrat names to shame in the process. Of course, CBRL doesn't have the history of the aristocrats, but it stands all the same; this is a world-beating yield in a low-yield world.

In addition, CBRL isn't overextending itself to pay that dividend. The company is set to earn more than $6 next year, so paying a $4+ dividend is not a problem. CBRL is spinning off cash it cannot use to grow the business, so I'm thrilled the company's management has decided to make shareholder returns a priority and pay out a large dividend.

The dividend should serve to buoy shares should CBRL fall on hard times with its operating results. A 4% yield is hard to pass up but consider that if shares fall at all, that yield would be even higher. I think CBRL has far more upside than downside just for this reason; operating results are important and I think CBRL is moving in the right direction, but the real reason investors want this stock right now is the yield.

CBRL has a good thing going and while you aren't going to see blistering top or bottom line growth from CBRL, I do think we'll see perhaps high single-digit EPS growth for the foreseeable future. That should provide more than enough firepower for the company to continue to return large amounts of cash to shareholders and grow that already enormous dividend. CBRL will become one of the great dividend growth stories in the coming years and now is your chance to get on board while shares are still cheap. I don't think the 4% yield will be around for long, so consider taking your position in CBRL while it is trading down on some operational hiccups.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.