Although the restaurant industry has seen its share of competitive pressure of late, there are important long-term trends in place that support continued industry growth, including two worker households and an aging population. Darden Restaurants, Inc. (NYSE:DRI), McDonald’s Corporation (NYSE:MCD), and SYSCO Corporation (NYSE:SYY) provide exposure to just about the entire industry and offer compelling yields, too.
Big Trends
When both spouses work, there is more money for eating away from home and, more importantly, less time available to cook at home. That’s led to a long-term trend of growth in the restaurant industry. Now, as the baby boom generation enters retirement, a massive generation is about to act differently than they have before with eating out on the cheap likely to increase.
Fast and Reliable
McDonald’s Corporation (NYSE:MCD) is at the forefront of the fast food industry. In many areas, McDonald’s has replaced the local diner, offering long hours, quick service, cheap eats, and a place for customers to talk over a cup of coffee. With a powerful brand and a good reputation, McDonald’s has a loyal customer base, even if they cheat and visit competitors from time to time.
Such “cheating” has been an issue for the company in the mature domestic market lately. New concepts that are higher quality, but only slightly more expensive, have left McDonald’s same store sales in The United States weak. While not a good sign, it is a cycle that the company has lived through before. It will do so again.
McDonald’s Corporation (NYSE:MCD), however, is an international company, with operations in some of the highest growth emerging economies in the world. So while the U.S. market is mature, it is getting important toe holds in the hearts and minds of customers the world over.
The top line has pulled back over the last couple of quarters, leaving the shares off of their recent highs. Long-term investors, however, should find the dividend yield of around 3% reasonably compelling. That said, waiting for a yield closer to 4% might be worthwhile for more patient types. The company has increased its dividend annually for decades.
A Little More Class
Darden Restaurants, Inc. (NYSE:DRI) owns Red Lobster and Olive Garden, among others. Although these chains are clearly nicer than McDonald’s Corporation (NYSE:MCD), they are not fine dining. Still, these types of nice, but not expensive restaurants are likely to become increasingly popular with an aging population seeking out “early bird” dinners.
Darden’s problem of late has been customers trading down to the same quick casual restaurants that have taken share from McDonald’s Corporation (NYSE:MCD). Although Darden has a host of other concepts that are still in growth mode, its two big brands are so large that they tend to drive overall results. So, performance has been relatively weak over the last few quarters.
That’s left the shares depressed and yielding around 3.7%. That could make now a decent time to consider buying into the largest casual dining company in The United States. More patient types might want to hold off until the yield is in the 4% to 5% range.
Of longer-term appeal here is the company’s collection of smaller brands, which include both casual and high-end eateries. These still growing concepts should keep overall results moving higher over time.
Serving the Servers
SYSCO Corporation (NYSE:SYY) is the country’s largest provider to the restaurant industry. It is the middle man that delivers food and other products to restaurants so they can feed their customers. Although investors appear concerned about the health of the company’s customers, acquisitions and expansion efforts have kept sales moving generally higher for a decade. Volatile commodity costs, including fuel, can make the bottom line a little jagged, but generally higher has been the norm here, too.
Serving everything from the local mom and pop restaurant to hospitals and nursing homes, the company has a broad reach in a still fragmented industry. International expansion and increasing sales of SYSCO Corporation (NYSE:SYY) branded products are both additional long-term positives.
With a 3% dividend yield and more than a decade of annual dividend increases behind it, the stock is trading at a compelling price point. That said, patient types should be ready to jump aboard if the yield gets to 4%.
Good Today, Better Tomorrow
The three restaurant related companies above are great businesses and cover a huge amount of spectrum in the industry. In fact, owning all three would give you exposure to just about every eating out option there is. They are all trading at decent yields today and are worth looking at. However, if there is a sell off, they might be even better buys.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends McDonald’s Corporation (NYSE:MCD) and SYSCO Corporation (NYSE:SYY). The Motley Fool owns shares of Darden Restaurants and McDonald’s. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Eating Out For Income originally appeared on Fool.com and is written by Reuben Brewer.
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