On the face of it, the fundamentals for Restaurant Group (LSE: RTN) look pretty good. Forecasts suggest P/E valuations averaging around the 10 to 11 level, with dividend yields of between 4.3% and 6.1%.
Having said that, dividends in cash terms are actually falling, and the 6.5p per share suggested for 2019 would be almost 50% down on 2017’s high of 12.69p.
The falling dividend is on the back of declining earnings, as the company’s Frankie & Benny’s and Garfunkel’s chains are suffering in the current downturn in discretionary spending — and they’re looking a bit tired to me.
The big dividends are down to a the shares having lost two thirds of their value over the last five years, and I reckon the cuts in the annual payout were very much overdue.
The latest update on Thursday showed sales going pretty flat overall, with the firm saying it’s expecting pre-tax profit in line with market expectations for the current year.
Total sales were up 1%, including one week’s trading from the newly-acquired Wagamama, and that’s the fly in the ointment right now.
While most companies facing falling earnings from jaded offerings might work on cutting costs, focusing on their best assets, and revamping the appeal of their outlets, Restaurant Group has done pretty much the opposite.
It’s trying to get out of its slowdown by expanding, at a time when demand for eating out is declining. Though shareholders did approve the takeover of Wagamama, it was a close-run thing and a full 40% opposed the deal on the grounds that the price was too high.
It was funded by cash, a rights issue, and new debt, and I fear for the effect on the balance sheet. I’m staying out.
Even in today’s tough conditions, the over-50s firm looks like it’s doing fine. Last week Saga told us its trading is going well, and its travel business looks especially impressive to me. Its itineraries are fully sold for the 2018-19 year, and 54% of targets have already been sold for 2019-20.
Catering to more mature clients who do not have screaming hordes of kids and who are likely to have more free cash to spend does seem like a canny business model to me. That’s backed up by the addition of another 250,000 people to its Possibilities memberships programme since September, taking the total to more than a million.
With the share price down, we’re looking at a significant boost to the dividend yield, now exceeding 8% per year. If that’s sustainable, I think it could be one of the most attractive on the market at the moment.
Cover by earnings looks strong enough to me at around 1.5 times, and it is a highly cash generative company. Results for the year to 31 January should be with us on 4 April, when we’re promised a strategy update.
I’m not expecting any drastic change, but I’m hoping to see confirmation of Saga’s commitment to dividends. On P/E ratios of only around eight, Saga is on my retirement investment shortlist.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.