Restaurant stocks corrected over the summer due to tepid guidance, setting up a new opportunity for income investors. The guidance calls for growth but slowing growth to be offset by wider margins. Wider margins mean earnings stability, if not earnings growth, supporting dividends, dividend growth, and share repurchases, all long-term drivers of shareholder value.

As conflicting as reports from the consumer industry are, restaurant companies continue to outpace the broader retail market even as their share prices flag. The latest data from the NRA shows August restaurant spending is up 0.3%, marking the 6th consecutive gain for the industry. On an inflation-adjusted basis, restaurant sales are up 1.8% over the past six months compared to negative growth for non-restaurant retailers, and restaurants are expected to continue to show strength through the end of the year. 

Darden: Growing, Growing, Growing 

Darden Restaurants (NYSE: DRI) grew before it acquired Ruth's Chris Steakhouse, and now its outlook is sizzling. The company is expected to improve earnings by at least 10% in 2024 with the full addition of the new brand. That puts the dividend payout ratio in the range of 55%, and at a level the company can sustain distribution increases while it leans into growth. 

Darden trades at 17X earnings, aligning with the broad market and the mid-point of restaurant stocks. However, it pays the group-leading 3.5% dividend yield and has a solid outlook for distribution growth and share repurchases. The company repurchased 200K shares in Q2 and has authorization to repurchase up to another $625,000, or about 3.6% of the market cap, with shares at $148. 

The analysts' activity was mixed following the Q2 report and weighing on the market. Mixed activity aside, the analysts rate the stock as a Moderate Buy and see it moving about 15% higher to near $170. 

Bloomin' Brands Offers Deep Value and Yield 

Bloomin' Brands (NASDAQ: BLMN) is not growing at the same pace as Darden, but it is growing, expected to grow in Q3, and expected to grow in 2024. Revenue growth is expected to be compounded by wider margins, solid cash flow, and capital returns. This stock pays a stout 3.28%, trading at the deep value of 8X earnings or less than half what you pay for DRI. What you get for that value is a very low 28% payout ratio, and the possibility for robust distribution increases over time. 

Bloomin' Brands is working hard to strengthen its balance sheet. The company reduced its debt and improved its cash position over the last year while paying dividends and repurchasing shares. Leverage is down to low-single-digits compared to the pandemic highs in the low-double-digits, and it should continue to fall and free up additional cash flow for dividends and repurchases. Until then, repurchases in Q2 amounted to roughly 1.75% of the float. Analysts rate this stock at Hold and see it moving up 17% at the midpoint and about 5% at the low end of the range. 

Restaurant Brands for Quick Diversification 

Restaurant Brands (NYSE: QSR) operates four distinct brands, including Tim Hortons and Burger King, which gives exposure to sit-down restaurants and fast food. The company’s guidance aligns with the group in that it expects top and bottom-line growth in Q3 and 2024 to sustain its capital return program. Regarding earnings, bottom-line growth is expected to outpace the top line by at least 200 basis points, aided by internal efficiency, leverage, and share repurchases. 

Evidence of the 2023 earnings strength can be seen in the recent repurchase authorization. The board approved repurchasing $1 billion in stock over the next 2 years, replacing the expired allotment. The company may also repurchase up to 10% of the floating shares within 12 months, but that authorization has been acquired before and not used. Analysts rate this stock a Moderate Buy and see it increasing by 16%.