What will they do with the cash?
If there is one thing that Brinker shareholders know, it’s that the company is focused on shareholder value. As the company becomes more profitable through international expansion, there are two likely places this extra cash will end up, share repurchases and dividends.
Shareholders in Darden Restaurants, Inc. (NYSE:DRI) are staring down the barrel of the opposite side of this coin. Darden Restaurants, Inc. (NYSE:DRI) is saddled with a heavy debt load, and poor performance. To make things worse, the company is issuing shares to help offset their cash flow issues. With shares up 0.46% in the last year, this mirrors a challenge being faced at Buffalo Wild Wings (NASDAQ:BWLD). This chain is issuing shares to help the company expand, and reward officers, but cash flow has been inconsistent or non-existent.
On the other side of the coin are Texas Roadhouse and Brinker. Each of these companies pays a yield of about 2.1%, and they are both committed to retiring shares. However, the level of share repurchases couldn’t be any different. Whereas Texas Roadhouse Inc (NASDAQ:TXRH) retired 0.35% of their shares in the last year, Brinker retired over 8% of their diluted share count.
Another difference between these two companies is their dividend payout ratios. If you look at each company’s core free cash flow (net income + depreciation – capital expenditures), you can see that Brinker is in a superior position to raise their dividend in the future. Texas Roadhouse Inc (NASDAQ:TXRH) used 55% of their free cash flow to pay dividends while Brinker only used about 36% of their free cash flow.
What should you do next?
Looking at the relative value of each of the aforementioned companies, it’s hard to argue with Brinker as a solid investment choice. Darden Restaurants, Inc. (NYSE:DRI) is struggling with negative same-store sales at all of its major chains. Buffalo Wild Wings is growing revenue, but on a quarter-to-quarter basis might deliver 20% EPS growth followed by a 10% EPS decline. When you add in the fact that Buffalo Wild Wings (NASDAQ:BWLD) has relatively little free cash flow, I have a hard time recommending the stock.
Texas Roadhouse Inc (NASDAQ:TXRH) could be a good value, but with shares trading for more than 20 times projected earnings, the company will have to beat estimates of a 13.67% growth rate to be a good deal. Investors who get the Brinker story, understand that new international restaurants will drive earnings. The company will likely put this extra cash to work retiring more shares and paying a higher dividend. If you are looking for growth and income, look no further than Brinker. Just because the market is missing this opportunity, doesn’t mean you should make the same mistake.
The article The Market Just Doesn’t Get This Stock originally appeared on Fool.com is written by Chad Henage.
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