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Restaurant stocks with a solid business model and strong potential for growth often make excellent candidates for investment. The top companies have a strong brand name that enables them to extend their operations to overseas markets easily via franchises. There is tremendous potential in developing markets and this is evident from the spectacular successes that companies like Starbucks, Dunkin Donuts, and McDonald's have enjoyed over the last ten years.

There are 16 companies in the restaurant sector that pay dividends. The average dividend yield within this sector is 2.4%, while the average P/E ratio is 21.4.

I have shortlisted five companies that have strong financials, high growth potential, excellent dividend yields, and P/E ratio below 20 (below industry average). I believe that these companies provide excellent value to investors in terms of the price at which they are trading, their positive future outlook, and the excellent dividends they pay.

Tim Hortons (THI)

Tim Horton's is a restaurant chain company whose business model revolves around identifying and franchising restaurant locations. The company operates in two regional segments - United States and Canada.

The market capitalization of Tim Horton's is around $8 billion, and it generates revenues in excess of $2.5 billion. EBIDA amounts to around $980 million, with net income of $627.9 million for 2011. This means that the EBITDA margin of the company is around 38.5% and its net profit margin is 25.5%.

Over the last fiscal year, the return on equity was almost 49%, and earnings per share for the trailing twelve month period was nearly $4. The company paid a total of $0.52 per share to shareholders, which equates to a dividend yield 1.3%. The P/E ratio is currently 12.91 - well below the industry average. Share are currently trading around $53, and has been gradually increasing throughout the month.

Tim Horton's displays excellent growth potential and an attractive dividend. I believe the dividend will increase as the company moves forward. I recommend buying shares now.

McDonald's Corporation (MCD)

McDonald's Corporation is a global brand that is well renowned for operating and franchising McDonald's restaurants across the globe. The company operates in the geographic business segments of the United States, Middle East, Europe, Asia-Pacific, and Africa.

McDonald's has a market capitalization of over $102 billion. The company employs a total of nearly 400,000 people and has revenues of over $27 billion. McDonald's has a net income in excess of $5.5 billion and EBITDA of over $8.4 billion. This equates to an EBITDA margin of almost 31% and net profit margin of almost 20.4%.

Shares have been trading around $100, with a below industry average P/E ratio of around 19. The company paid a dividend of $2.53 last fiscal year, which equates to a dividend yield of 2.8 percent. Furthermore, earnings per share over the last twelve month period amounts to nearly $5.30.

I recommend purchasing shares of McDonald's, primarily due to a good dividend yield and a consistently appreciating price over the past five year period.

Darden Restaurants (DRI)

Darden Restaurants is well-known for its ownership and operations of casual-dining restaurants in United States and Canada. The company has a large portfolio of highly recognized restaurant brands that includes:

  1. Red Lobster
  2. Seasons 52
  3. Bahama Breeze
  4. LongHorn Steakhouse
  5. Olive Garden
  6. The Capital Grille

Darden has a market capitalization of nearly $6.5 billion. The company employs over 180,000 people and generates revenues in excess of $7.5 billion. Net income is around $500 million and EBITDA amounts to almost $11 billion. This equates to an EBITDA margin around 14% and a net profit margin around 6.4%.

The company realized a return on equity of 25% last fiscal year, with earnings per share of $3.26 over that same period. The company paid dividends of $1.28 per share over this period, which produced an excellent dividend yield of 3.38%.

Darden has been trading around $51, and has a P/E ratio of 15.61. The beta is 0.89, which means that the stock is moving in tandem with the market.

Its financial indicators are impressive -- especially the dividends yield, and the stock is trading at a reasonable price. I recommend buying shares of Darden at this time.

CEC Entertainment (CEC)

CEC has a market capitalization of $719.75 million. The company employs 17,300 people, generates revenues of $817.25 million, and has a net income of $54.03 million. The firm's earnings before interest, taxes, depreciation and amortization (EBITDA) amount to $185.58 million. This means that the EBITDA margin of the company is around 22.7% and the net profit margin is over 6.6%.

The company realized a return on equity of around 33 in the previous fiscal year. Earnings per shares over the past twelve month period amounted to $2.80.

The company paid dividends of $0.22, which equates to a dividend yield of 2.3%. Shares are trading around $38, with an impressive P/E ratio of 13.6. Furthermore, the beta is 1.04, which means the company has been moving in the same direction as the market. This spells good news for the company, as the market has been experiencing excellent growth in 2012.

CEC's financial indicators are excellent, and there is huge potential for the company going forward. At the price of $38, shares are dirt cheap. I recommend buy shares of CEC at this time.

Cracker Barrel Old Country Store (CBRL)

Cracker Barrel is an operator and developer of retail concepts and restaurants around United States. The brand is renowned for providing a friendly home atmosphere and offering a wide range of popular products.

The market capitalization of the company stands at $1.3 billion. Cracker Barrel employs over 67,000 people, and generates revenues in excess of $2.4 billion. Net income is around $85 million and the EBITDA margin of the company amounts to nearly $230 million. This equates to an EBITDA margin of around 9.5% and a net profit margin of almost 3.50%.

Cracker Barrel realized a return on equity of around 37% and its earnings per share amounted to $3.62 over the last fiscal year. The company paid dividends of $0.88 per share, equating to a dividend yield of 1.80%. The stock is trading around $55 and has a remarkable P/E ratio of almost 15. The beta is 0.89, which means that it is appreciating at a rate similar to the market.

Cracker Barrel has solid financial indicators and an adequate dividends yield. I highly recommend buying shares of Cracker Barrel at this time.

Source: 5 Restaurant Stocks For Excellent Dividend Yields