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Jonathan Heller Sees Restaurant Comeback

But risks remain for sector as costs are pushing higher coming out of the pandemic.

The restaurant sector is showing signs of a comeback, but higher labor and food costs could take a big bite out of returns.

That’s the outlook from TheStreet’s Jonathan Heller, writing in Real Money. “We got another sign of a potential return to normality in restaurant land Thursday when McDonald's MCD made a couple moves to return more capital to shareholders,” Heller said. “First, McDonald's raised its quarterly dividend 7% to $1.38 a share, which equates to a 2.25% yield. Second, the company restarted the $15 billion stock buyback program it suspended in 2020.”

McDonald's has also maintained its status as a dividend champion and has raised the dividend at a 7% compound annual growth rate over the past 10 years.

Heller also likes the restaurant sector overall, which is back off the mat after 18-months of pandemic lockdowns. “The sector continues to perform well year to date, with a basket of 40-plus restaurant names with market caps in excess of $100 million up an average of 39.5% versus 19.7% for the S&P 500, 15.2% for the Russell 2000 Index and 24.5% for the Russell Microcap Index,” he says.

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Heller also lists his current "Big Five" restaurant stocks -- a self-coined group that includes McDonald's (up 16% year to date), Chipotle Mexican Grill  (CMG) - Get Chipotle Mexican Grill, Inc. Report (up 40%), Yum Brands  (YUM) - Get Yum! Brands, Inc. (YUM) Report (up 16.5%), Domino's Pizza  (DPZ) - Get Domino's Pizza, Inc. Report (up 29%) and Darden Restaurants  (DRI) - Get Darden Restaurants, Inc. Report (up 36%) -- are now up an average of 27.5% year to date.

“The worst sector performer at present is newcomer BurgerFi International (BFI)  (down 34% year to date), which went public last December after it was acquired by special purpose acquisition company Opes Acquisition,” he said. “BurgerFi is known for using grade A Angus beef in its burgers; it has 118 locations (22 company-owned and 96 franchised) in 22 states by my count. I've got to admit that I am getting hungry as I write this, and I believe there's a BFI location within striking distance, so I will be giving it a try. I'll let the dust settle, however, on the stock at this point.”

Heller’s concern for the sector remains rising labor and food costs. “There’s still pent-up demand among consumers to eat outside the home, but I'm not sure what the appetite will be if menu prices continue to rise,” he added.

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