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Is Brinker A Fair Weather Dividend Grower?

On Wednesday, I took a good look at Lowe’s (NYSE: LOW) as a potential dividend growth stock…

At first glance, it had all the trappings of a dividend grower in the making – consistent increases, rising yield, etc. But a little analysis uncovered a few warning signs. Mainly, its meandering-to-weakening income meant that continual dividend increases are less than a sure bet.

So, the verdict was, prudently, “Better wait and see.” (Exciting, I know. But dividend investing is a game of patience. We’re not day traders, after all.)

Today, I’ve got another dividend payer that appears to be on its way to becoming a certified growth stock: Brinker International, Inc. (NYSE: EAT).

Brinker, as you might have guessed from its ticker symbol, is in the restaurant business. Most notably, it owns the casual dining restaurant chain, Chili’s Grill & Bar, which has about 1,500 locations worldwide. Brinker also owns the more upscale, but less prevalent, Maggiano’s Little Italy.

The company started paying dividends in 2006, making five increases since. Yesterday, Brinker announced a further 25% increase to $0.20, representing a 2.36% yield.

The company’s history is spotty, however. It’s had just two years of consecutive increases, letting its dividends stagnate from 2007 through 2009.  That’s not surprising, considering its stock declined just under 66.5% over the same period.

And therein lies the problem…

Dividends in Good Times AND Bad

We want dividend stocks that increase each year, regardless of market performance. And the restaurant business in particular is volatile and hardly recession proof. When the economy goes bad, it’s one of the first sectors to suffer and takes a harder beating than most.

Case in point: Between 2007 and 2009, while the S&P declined about 40%, Brinker fared much worse, losing more than 66%.

Of course, these days, the restaurant industry is in much better shape. In June, the Restaurant Performance Index (RPI) – a monthly composite index that gauges the health and outlook of U.S. restaurants – showed that the industry is expanding.

Brinker is reaping the rewards of that expansion, too. Its daily total returns are up an average of 28% year-to-date, compared to the S&P 500’s gain of 13% over the same period. Meanwhile, the restaurant industry in general is actually down 1.3% in 2012, according to Morningstar data.

Such underperformance for the industry might be an early indication trouble is afoot. And that’s substantiated by the fact the RPI included a reduced outlook, despite the expansion in June:

“Operators have definitely tempered their expectations for the future. Each of the four expectations indicators softened in June, including restaurant operators’ least positive economic outlook in eight months. Still, market conditions are substantially better than two and three years ago,” says Hudson Riehle, Senior Vice President of the Research and Knowledge Group for the Association.

But in the end, the past and future performance of the industry is beside the point. What’s important is that in good times and in bad, the dividends should keep on growing. And Brinker, unfortunately, has already shown that in bad times, it’s willing to let its dividends fall to the wayside.

What’s more, management has constrained itself further by committing to a target dividend payout ratio of 40%. The DPR is currently at 36%, so there’s not a lot of breathing room left for dividends to increase without a rise in earnings per share (EPS). (This might remind you of a similar DPR issue we saw with Lowe’s on Wednesday.)

Bottom line: Brinker’s EPS is on the rise and the stock is performing well. But none of that matters since the company turned its back on dividends when times got tough. Fair weather dividend payers just don’t cut it.

Best Regards,

Ryan Anders