Restaurant Stocks: Top Dividend Heavyweights to Buy Right Now

Restaurant Brands International Inc. (TSX:QSR)(NYSE:QSR) and other restaurant stocks that could have deep value for contrarian income investors.

| More on:
Female friends enjoying their dessert together at a mall

Image source: Getty Images

Restaurant stocks have been crushed, as investors brace for double-digit comp declines that could be on the horizon. With many small dine-in restaurants standing to go under, some are of the belief that current pressures plaguing all restaurants will remain forever. While it seems like it in the heat of the moment, I believe that over time, consumer habits will gradually return to the way they were before the pandemic.

Deep value in restaurant stocks

If you seek value in the restaurant scene, you can spread your bets across a broad range of names and probably do very well over the long haul. Some of the smaller, less financially flexible players in the space could stand to go under amid the coronavirus crisis, as operating costs come rolling in while revenues collapse by 75% or more.

Although it’s hard to find anything to be bullish about in the restaurant scene, it’s worth remembering that not all restaurants are built the same. Some have deeper pockets and more than enough liquidity to ride out a downturn relatively unscathed, with a lost quarter or two.

Others are more vulnerable to collapse and could stand to suffer in an economic contraction that could drag on well after the coronavirus is eradicated. As such, value investors should pick their spots carefully to tilt the risk/reward trade-off heavily in their favour.

AVOID: Upscale dine-in restaurant stocks

First, upscale dine-in restaurants like Swiss Chalet, The Keg, East Side Mario’s, Montana’s Cookhouse, and Kelsey’s (all brands under the Recipe Unlimited umbrella) ought to be avoided, as they’ll be most affected during and after this pandemic. Upscale dining isn’t just breaking the rules of social distancing during a pandemic, but these restaurants are also positioned to underperform through the recession that the coronavirus is going to leave behind.

It’s one thing to ask people to dine in the year of a pandemic; it’s another thing to ask financially strapped consumers to pay a considerable premium for service, restaurant décor, and a gratuity of at least 15%. Many belt-tightening Canadians aren’t going to be able to afford to dine out at the Keg until the recession is over, as they’ll need every dollar to go as far as it can during the tough times. So, that rules out upscale dine-in restaurant stocks.

BUY: Well-established fast-food stocks

Up next, we have fast-food firms that derive a considerable amount of sales from dining in. Warren Buffett play Restaurant Brands International (TSX:QSR)(NYSE:QSR) will suffer over the near term, as consumers will be unable to dine in at the local Tim Hortons or Burger King. After the pandemic is over, however, Restaurant Brands stock is in a spot to come roaring back, potentially as sharply as it crashed.

Fast food is an inferior good, meaning it tends to sell well when times are tough. In a recession, the demand for value menu items and all the sort will increase, and that could help Restaurant Brands rise out of its funk and potentially make up for two quarters of lost business.

The stock sports a 5% yield at the time of writing and has no business being down 45% from its highs. The fast-food kingpin may not be the most liquid amid the crisis, but it’s got what it takes to survive and thrive in a post-pandemic environment.

BUY: Take-out-oriented restaurant stocks

Finally, we have take-out focused restaurants like Pizza Pizza, which will hold their own during and after the pandemic. Pizza is made to order, and it’s a perfect option for a self-isolating person who’s sick of cooking on their own.

Although Pizza Pizza cites that COVID-19 has negatively affected the royalty pool system sales, I’d argue that given the take-out-oriented nature of the restaurant that management is as much to blame for slowed sales as the coronavirus. Just have a look at shares of Pizza Pizza, and it screams that there were substantial issues far before the pandemic arrived. With Domino’s Pizza is near its all-time highs, I don’t buy that COVID-19 is the sole reason for Pizza Pizza’s shortcomings.

Foolish takeaway

Of all restaurant stocks, I see Restaurant Brands as the best bargain for your buck. It’s oversold, undervalued, and ripe to rebound to $100 by year-end.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette owns shares of RESTAURANT BRANDS INTERNATIONAL INC. The Motley Fool owns shares of PIZZA PIZZA ROYALTY CORP. The Motley Fool recommends Domino's Pizza and RESTAURANT BRANDS INTERNATIONAL INC.

More on Dividend Stocks

Canadian Dollars
Dividend Stocks

How I’d invest $1,000 in December to Make Easy Passive Income

These BMO covered call ETFs are great for generating passive income.

Read more »

golden sunset in crude oil refinery with pipeline system
Dividend Stocks

Advisor Commentary: Should You Buy Algonquin Power Stock? [PREMIUM]

Declines of this magnitude aren’t generally found in utility-land, and it behooves us to have a peek.

Read more »

TFSA and coins
Dividend Stocks

TFSA: 3 Buy-and-Hold Dividend Stocks With Massive Long-Term Potential

These dividend stocks could more than double your TFSA, all from reinvesting solid passive income for years to come.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

These 4 Canadian Dividend Stocks Are a Retiree’s Best Friend

Dividend stocks are a retiree's best friend. But what about during a recession? Buy these four dividend stocks for solid…

Read more »

top TSX stocks to buy
Dividend Stocks

3 High-Yield Dividend Stocks to Earn a Truckload of Passive Income in 2023

High-yield dividend stocks such as Keyera and Fiera Capital are well poised to deliver consistent returns to shareholders in 2023.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Dividend Stocks

Retirees: Supplement CPP With 3 Stocks That Pay You Every Month

Equity investors can supplement CPP payouts by creating a portfolio of monthly paying dividend stocks such as Savaria.

Read more »

Profit dial turned up to maximum
Dividend Stocks

Beat the Market With 2 Growing Companies

Dividend-paying TSX stocks such as Restaurant Brands International and Brookfield Asset Management are top long-term bets.

Read more »

Electricity high voltage pole and sky
Dividend Stocks

Should You Buy Algonquin Stock Now or Wait?

Algonquin Power stock has a massive 9.8% dividend yield today! Is now the time to buy or should income investors…

Read more »