Del Taco Is A Tasty Treat For Dividend Growth Portfolios

Mixed Results And Del Taco Back To Support

Del Taco NASDAQ: TACO is turning into a tasty treat for dividend growth investors.  The company's business was hurt by the pandemic but only briefly and it has come back stronger than ever. Now, the company continues to invest in its digital presence as well as in its franchise growth strategy and we see growth accelerating over the next 12 months. The company has inked 7 new deals this fiscal year including 4 since the last reporting period that promise to bring 53 new restaurants to 6 states and more are on the way. Along with the growth, the company is also paying a safe 1.25% dividend yield that we see growing along with the company's business.

Del Taco Misses Revenue Estimates

Del Taco had a good quarter despite missing the consensus estimate for earnings. The $124.20 in consolidated revenue is up 2.8% from last year and 3.3% versus 2 years ago but missed the Marketbeat.com consensus by 50 basis points. 50 basis points is a slim margin but a miss is a miss so it's no surprise that price action is down in early trading. Strength was driven by the franchise businesses which are up 2% over last year on a comp basis while company-owned stores are up only 1.6%. Total comps are up 1.8% and aided by a 1% contribution from new stores. The company did not break out sales through eCommerce channels but we expect they were strong. Del Taco recently launched a new CRM program that we see aiding sales growth long into the future.

Moving down the report, the news is equally mixed. While margins contracted under the weight of increasing costs they contracted less than expected and drove better-than-expected earnings. Restaurant-level margins fell 150 basis points to 16.5% on an 80 basis point increase in labor cost and a 100 basis point increase in the Other category. This was offset by a 30 basis point improvement in food and paper cost that we are pleased to see. This is the first glimmers that inflationary pressures may be subsiding but we won't read too much into that. 30 basis points in food and paper cost could easily be accounted for by efficiencies and not by price reductions. With fewer people in the stores, the company can easily cut back on its paper costs. 

The company offered some guidance but nothing about revenue or earnings expectations. The company is expecting inflation to run 2% over the next year and 5% in Q4 of this year, with the labor cost rising 6% as well. The company plans to battle this with a 4.6% increase in menu prices so we should see at least that much growth in the next quarter. 

Del Taco Is Returning Capital To Shareholders

Del Taco has only been paying a dividend for a few quarters but the company's metrics match up with what we consider to be a strong and healthy payout. The stock is yielding about 1.25% with the company paying out about 25% of its earnings with earnings growth in the forecast. the balance sheet is strong as well but carries some debt but nothing to worry about yet. The silver lining is that that is used for growth and leverage is still very low and coverage ample. Del Taco may not have plans to increase the dividend but it is our view that the company could easily sustain a mid-single-digit to low double-digit distribution growth rate for many years into the future.

The Technical Outlook: Del Taco Retreats To Support

The technical picture for Del Taco stock was turning bullish before the earnings release and that hasn’t changed. Price action hit a bottom and formed a Head and Shoulders reversal pattern that was confirmed by the break above $9. Now, in the wake of the Q3 earnings report, price action is down a little more than 3% and preparing to test support at the $9 level. Assuming support at the $9 level is confirmed, we expect to see the stock continue its reversal and begin working its way higher. The next major hurdle will be resistance at the $9.40 level and $9.50 level, a break of which would be very bullish.