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Can this 5% yielder turn it around in 2017?

Despite rising 65% between July and August last year, shares in Frankie and Benny’s owner Restaurant Group (LSE: RTN) are still trading well below previous highs after a truly dire 2016. Understandably concerned investors will be hoping that the company recovers its lost form over the next 12 months. However, following today’s trading update, I can’t see much light ahead.

Underperforming

In Q4, like-for-like sales were particularly poor, dropping 5.9% thanks to underperformance across the group’s Leisure brands. For the full year, total turnover increased 0.9% on a 53-week vs 53-week basis, but like-for-like sales were still down by 3.9%.

With figures like these, the company’s statement that trading “continues to be challenging” comes as no surprise, even if things are expected to improve later in H2 as its turnaround plan takes effect. Although results for the 53 weeks ending 1 January are expected to be “in line with previous guidance“, this isn’t saying much.

The fact that shares in the group were down a whopping 11% in early trading should tell you just how poorly today’s statement was received. 

Cost pressures

Right now, shares in Restaurant Group trade on an initially attractive-looking price-to-earnings (P/E) ratio of 12 and come with a chunky 5% yield. With relatively new management at the helm, a revitalised menu and cost controls in place, the company’s appeal for contrarians isn’t hard to fathom.

The trouble is, I don’t see things improving any time soon for the simple reason that the group’s destiny is, to a point, out of its own hands. The relentless rise of online shopping means that businesses with significant exposure to retail parks are coming under increasing pressure to lower prices in an effort to get people through their doors. This situation could further deteriorate if inflation continues to rise.

The restaurant industry is also notoriously competitive and I’m struggling to see why families would visit the group’s restaurants on a regular basis when so many other options are available. Moreover, the company has remarked that it faces a barrage of external cost pressures over the next year, including (deep breath) “the National Living Wage, the National Minimum Wage, the Apprenticeship Levy, the revaluation of business rates, higher energy taxes and increased purchasing costs due to the combined effects of a devalued pound, and commodity inflation”.  

A better option?

In my opinion, a far better proposition in this industry would be Greggs (LSE: GRG). Last week, the £1bn cap baker reported that Christmas trading had been “particularly strong“, generating shop like-for-like growth of 2.3% in the final two weeks of the year. With sales rising 6.4% over the last three months — allowing the company to record its 13th consecutive quarter of like-for-like sales growth — Greggs now expects full-year results to be “slightly ahead of previous expectations”. While not immune to some of the aforementioned cost pressures and migration of shoppers online, the company’s presence in stations, services and most high streets makes it a safer play.

Trading on a P/E of 16 for 2017, shares in Greggs are more expensive but not ludicrously so given the company’s record of generating consistently high returns on capital over many years. Greggs also has £35m in cash on its balance sheet and excellent free cash flow. A yield of 3.2% for 2017 isn’t massive but, given today’s dire statement and troubling outlook, this payout looks far more secure than that offered by Restaurant Group. 

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.