The consumer discretionary sector is by far the most attractive sector (for me) at this time. The sector is expected to see high-single-digit earnings growth this year and market-leading, low-double-digit earnings growth next year. This growth is driven by labor market trends that have the number of workers at an all-time high, wages growing by +3% annually, and unemployment at record lows.
The Conference Board's Consumer Confidence Index moved up in May. The move was bigger than expected and a sign of underlying consumer strength. The index reading of 134.1 is nearly 5 points above the previous month, above expectation, and near the 18-year high. The Present Conditions and Expectations indices, both sub-components of Consumer Confidence, showed strong increases.
According to the Conference Board, the primary driver of Consumer Confidence is the labor market.
Consumers expect the economy to continue growing at a solid pace in the short-term, and despite weak retail sales in April, these high levels of confidence suggest no significant pullback in consumer spending in the months ahead.
The only negative in the Consumer Confidence Report is the workers feel mixed about their wage prospects. From what I'm seeing in the labor markets, it's better to go find a new job than stick with the old one, a condition that may impact workers' outlook on wages. Employees are so scarce employers are forced to offer incentives and higher wages to attract them. Employees who choose to stay in place may not see the same benefit increases.
This does not mean wages aren't rising; it means wages aren't rising for people who aren't changing jobs. The JOLTs report measure of Job Quits, the rate of voluntary job leavers, shows a high rate of quits. A high rate of quits equates to a high rate of employee confidence. When an employee is confident they can get a better job, they are more likely to quit.
The bottom line here is that consumer confidence is high, consumer confidence is driven by the labor market, the labor market is still rocking, and consumers are expected to continue spending on into the summer (at least).
The threat of trade war may have some small impact on habits, but I think that will be more a shift to Made In America (or not China) than a reduction in spending. In that light, consumer-focused businesses are an obvious choice for investment. Consumer-focused businesses that pay a dividend and have a positive outlook for dividend growth are the best choice.
McDonald's, The Obvious Choice
McDonald's (MCD) is the most obvious choice when it comes to food-driven dividend growth because it is a Dividend Aristocrat. McDonald's is, of course, the largest global operator of fast-food restaurants and franchises.
The company just reported a blowout quarter in which comps topped estimates by a large margin. Global comps came in at 5.4% despite mounting trade tensions, and U.S. comps came in at a strong 4.5%.
We remain focused on optimizing execution of the Plan, and our recent acquisition of Dynamic Yield further demonstrates our relentless determination to seize opportunities to unlock greater potential and position McDonald's for long-term sustainable growth.
The fact McDonald's is sticking with its China Plan is a sign of long-term-oriented thought. China-focused business and supply lines may be impacted in the near to short term, but the long-term outlook for global growth remains positive.
McDonald's has been raising its dividend for 42 years, a long time and enough to place a fairly high expectation on future increases. The yield is above the S&P 500 average, but only just at 2.25% relative to current prices. Regardless, it has a history of dividend increases and a moderately safe payout ratio of 59%, so it is an attractive choice.
Analysts are bullish on McDonald's as well. There was a ripple of upgrades in the wake of the last report, and most rate the stock a strong buy/outperform. The consensus price target of $210 is about 10% above the current price and a low estimate in my view.
Texas Roadhouse, The Best Yield
Texas Roadhouse (TXRH) operates two chains of internationally-based restaurants, Texas Roadhouse and Bubba's 33. Texas Roadhouse is a casual steak house, and Bubba's 33 is a family-oriented pizza and burger joint. The company has about 590 locations.
Texas Roadhouse just reported a pretty good quarter, but the results did not match up to expectations. TXRH reported a revenue increase of 10% from the prior year on a 5.2% increase in comps at company-owned stores.
The real problem for investors was the miss on EPS, which was avoidable if not for rising labor costs. Labor costs cut into the margin by 128 basis points and aren't showing signs of abatement according to the company CEO.
Much of the labor increase was driven by wage rate and other labor inflation that currently does not show signs of abating,
Despite the labor-cost headwind, most analysts are bullish on the stock. The average analyst rating is a hold/buy with at least one very bullish. Baird just upped its rating on the stock to Outperform from Neutral with a price target of $65. Baird says the selling pressure related to a recent African swine fever scare is overdone; any price increases related to that are transitory.
Regardless of the minutiae of the earnings report, Texas Roadhouse is showing strong growth and that strength is expected to continue. Along with that, the dividend yields 2.25% and has an eight-year history of increases. The payout ratio is a low 45%, so there is a reasonable expectation of future, sustainable dividend increases.
Bloomin' Brands, A Bouquet Of Top Properties
Bloomin' Brands (BLMN) is an underappreciated operator of top restaurant names. Brands in the portfolio include Outback Steakhouse, Carrabba's, Bonefish Grill, and Fleming's Prime Steakhouse. At last count, the company owned nearly 1,200 properties, mostly in the U.S., but spread across 30 countries.
BLMN just reported a solid quarter and is poised to build on that performance this year. Revenue grew a mere 0.9% YOY, but comps beat consensus and margins improved, both pointing to further improvement to revenue and earnings. Comps grew 2.5%, better than 1.8% expected, and margins improved despite upward pressure in wages.
The average analyst rating is a strong buy/outperform with a price target of $22.50. Guggenheim just upped its rating to an outperform with a price target of $25. It sees increasing momentum after two consecutive quarters of positive growth.
Bloomin' Brands' stock just got a 7% lift from addition to the Small Cap 600. The move means fund managers around the world will have to move into the stock in order to match their benchmark.
The dividend is only about 2.15% at today's share prices, and the increase history is only four years, but there is a mitigating factor regarding the dividend and future expected increases; the payout ratio. The payout ratio is a mega-low 28% and at a level that screams future distribution increases to come.
Ruth's Hospitality Group, Quietly Growing The Dividend
Ruth's Hospitality Group (RUTH) operates approximately 150 company-owned and franchised properties under the name Ruth's Chris Steak House. Locations are primarily in the U.S., but spread across the globe.
Ruth's just reported a solid quarter driven by higher check averages. Revenue grew 2.8% to beat consensus on a 1.8% increase in check averages. Net operating results were also impacted by the acquisition of two properties from a long-time franchisee, acquisitions that will help fuel results in coming quarters.
While the growth outlook for this stock is a bit limited, there aren't plans for an extensive campaign of new stores; the outlook is positive. Revenue in the next quarter is expected to grow 2.75%, and that may be a low estimate. The average analyst rating is a hold, leaning to buy, with a price target of $28.
The dividend is one of the most attractive features of this stock. The yield is about 2.20% at today's prices, and that is coupled with a six-year growth history and a distribution-sustaining 35.5% payout ratio.
The Risk Is Shared, If Not Equally
The risk that these companies all share is exposure to overseas markets. The growing trade war with China, tensions with other countries, and the shift to nationalism are all factors that will weigh on revenues for these companies. A break-down of earnings growth between companies with and without overseas exposure tells the tale.
FactSet reports that companies with more than 50% of their revenues coming from non-U.S. sources saw the biggest declines in earnings growth during the first quarter. Companies with more than 50% of their revenue coming from overseas sources saw net earnings decline double digits, while those whose revenues were more than 50% U.S.-derived saw their EPS increase.
Four Reasons To Be A Buyer
The reasons to buy are simple. One, these stocks are all in the consumer discretionary sector, the sector with the highest expected earnings growth over the next six quarters. Two, these companies are all posting positive growth. Three, these companies all pay healthy (AKA safe) dividends. Four, they all have an expectation for dividend increases, a long-term driver of shareholder value.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.