Investing in well-known businesses with loyal customers is as close to a foolproof investing strategy as possible. This is because loyal customers often spend more frequently and heavily than other customers, which can help a company steadily grow its sales and profits.
Steakhouse restaurant chain Texas Roadhouse (TXRH -0.37%) arguably fits this description to a T. But is the stock a buy for dividend growth investors? Let's dig into Texas Roadhouse's fundamentals and valuation to find an answer.
Sizzling growth prospects
Often, the stories behind great businesses are just as interesting, if not more so, than the businesses themselves. Unbelievably, Texas Roadhouse's formula for success that it uses to this day was drawn out on a cocktail napkin by founder Kent Taylor. The secret ingredients to Texas Roadhouse's winning ways are to serve made-from-scratch food at a great price and couple that with top-notch guest service.
Image source: Getty Images.
Tracing its roots back to its first store opening in Clarksville, Indiana, in 1993, Texas Roadhouse has since grown to more than 700 restaurants in 49 U.S. states and 10 foreign countries as of March 28. These restaurant concepts include Texas Roadhouse, Bubba's 33, and Jaggers.
| Metric | Q1 2022 | Q1 2023 |
|---|---|---|
| Comparable-sales growth rate | 16% | 12.9% |
| Total restaurant count | 672 | 704 |
Data source: Company reports.
The company's total revenue surged 18.9% higher year over year to $1.2 billion in the first quarter ended March 28. Thanks to the quality food and guest-first experience that Texas Roadhouse provides, it shouldn't be a surprise that it continued to thrive during the quarter.
In order to keep up with rising costs of raw materials and labor, the company raised its prices to guests. This contributed to a 5.3% growth rate in its comparable sales via the average customer check for the quarter. Even with elevated inflation weighing on the disposable income of its guests, foot traffic in the quarter rose by 7.6% over the year-ago period. These factors explain how the company's comparable sales grew at a lesser rate than in the prior year, but still at a double-digit clip.
Texas Roadhouse's diluted earnings per share (EPS) increased by 18.4% year over year to $1.28 during the first quarter. A faster rise in the company's total expenses than in its total revenue contributed to a nearly 30-basis point decline in its net margin to 7.4% for the quarter. But this decreased profitability was largely offset by a reduction in Texas Roadhouse's share count. That is how diluted EPS grew nearly as fast as total revenue in the quarter.
Moving forward, analysts anticipate that the company can continue to grow at an impressive rate. Additional restaurant openings and share buybacks are why Texas Roadhouse's analyst consensus for annual diluted EPS growth is 16.9%, which is more than the restaurant industry average of 15.2%.
The dividend can keep growing rapidly
Texas Roadhouse's 2% dividend yield is moderately above the S&P 500 index's 1.7% yield. Surprisingly, the payout growth has also been off the chart in the past 10 years. The quarterly dividend per share has more than quadrupled to $0.55 during that time.
TXRH Dividend data by YCharts
And the cherry on top is that with the dividend payout ratio expected to be around just 47% in 2023, the payout should have plenty of flexibility for future growth. This is because such a modest payout ratio leaves Texas Roadhouse with enough capital to expand its restaurant footprint, repurchase shares, and repay debt.
A great stock at a deep discount
Texas Roadhouse's stock price has soared 40% in the past 12 months, yet the stock still appears to be cheap. Texas Roadhouse's forward price-to-earnings ratio of 19.9 is well below the restaurant industry average of 24.6. This is why I believe the stock is a no-brainer buy for dividend growth investors.
