Cracker Barrel Will Unlock Shareholders' Value with a Special Dividend

Cracker Barrel Will Unlock Shareholders' Value with a Special Dividend

Shares of Cracker Barrel Old Country Store have experienced a significant rise on the stock market since October 2011, moving from $40 per share to nearly $112 per share. It is also an interesting option for income investors, as the company has consistently increased its dividend payment over the past seven years. Biglari Holdings, the company's largest shareholder, has mentioned that it was considering a bid for the company because it believed that under Biglari's management, Cracker Barrel's assets would be much more productive. At the current price, is Cracker Barrel a better buy than McDonald's and Chipotle Mexican Grill ?

Most of its business derives from travel visits
Cracker Barrel operates based on the concept of a restaurant with a gift shop, with around 624 Cracker Barrel stores in 42 states in the U.S. Most of its revenue, more than $2.1 billion, was generated from the restaurant segment while the retail segment contributed around $540 million in sales, accounting for around a fifth of the total revenue in 2013. What might attract investors is that its core customers are totally different from those of McDonald's and Chipotle. While McDonald's is the place for fast, convenient, and cheap food, Chipotle is a more premium type of restaurant serving Mexican foods. The core customers of Cracker Barrel, on the other hand, are travelers. According to CEO Sandra Brophy Cochran, around 40% of its total business came from travel visits.

Share repurchases' value does not flow to shareholders
Biglari, a 20% owner of Cracker Barrel, mentioned that the business had generated more cash than it consumed. Thus, it would like Cracker Barrel to manage capital more efficiently to deliver more shareholders' value. Biglari did not want the company to open new stores because of a low return on invested capital, and should instead accumulate cash and repay debt in a low-interest environment.

Although the company has returned $18.5 million in cash to shareholders via share buybacks in the past two years (through the third quarter 2013), it then issued more shares via stock options and grants as compensations to the Board and to management. As a result, the number of shares actually increased from 22.84 million in fiscal 2011 to nearly 23.8 million in fiscal 2013. Consequently, the value of shareholders has been transferred to the company's board and management.

McDonald's and Chipotle seem to be better than Cracker Barrel in terms of creating shareholder value via share repurchases. In the past four quarters, McDonald's bought back nearly $1.4 billion worth of shares, while Chipotle returned more than $232 million to its shareholders during the same period. Due to the share repurchasing activity, Chipotle's share count has declined from 31.85 million in September 2012 to nearly 31.3 million in September 2013. McDonald's total number of shares stayed nearly flat at around 1 billion.

To enhance shareholder value, Biglari proposed that Cracker Barrel should pay shareholders a special dividend of $20, effectively giving investors a 18% yield. It would convert the value, which was previously flowing to the company's board and management, to shareholders.

Cracker Barrel is a good stock for income investors with its current yield. At the current price, it offers investors a dividend yield at 2.80%, with a reasonable payout ratio at 49%. Among the three, McDonald's is still the best income stock, yielding 3.40% with a 56% payout ratio, while Chipotle gives investors no dividend at all.

My Foolish take
At $111.30 per share, Cracker Barrel is valued at a bit more than 11 times its EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation and amortization). It is just a bit more expensive compared to an EBITDA multiple of 10.6 of McDonald's, but still much cheaper than the fast-growing Chipotle with an EBITDA multiple of 26.3. With a 2.80% dividend yield and the potential to unlock a lot of shareholder value, I think Cracker Barrel could fit well in the income portfolios of long-term investors.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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