Cracker Barrel Old Country Store, Inc. $CBRL served up my favorite menu item last week…another dividend increase! It added a cherry on top in the form of a special dividend, further adding to my portfolio income.

The announced dividend raise was from $1.15 to $1.20 per share, an increase of 4.35%, payable on August 4th for shareholders of record on July 14th.  Additionally, management also declared a special dividend of $3.50 per share, paid on July 28th to shareholders of record on July 14th.

Add up the regular annual dividend of $4.80 and the $3.50 special payout and investors are looking at an attractive 5% return on their capital over the next 12 months.

A History Of Dividend Growth

This continues a long track-record of dividend growth for the company, as it marks the 15th year of annual dividend increases for shareholders.

The growth has been impressive, as Cracker Barrel has raised the dividend at an annualized rate of 23.8% over the last decade, and 37.7% over the last 5 years.

The special dividend is also becoming a regular occurrence, as Cracker Barrel paid a $3.00 special dividend in 2015, and a $3.25 one in 2016. So not only is the regular dividend seeing growth, but the special payouts are as well.

More Than Just A Dividend Stock

There’s more to the Cracker Barrel story than the dividend, as it has seen strong capital gains over the years as well. The stock is one of my better performers in my portfolio, more than doubling in price since I bought it in March of 2013.

The price gains are being driven by consistent earnings growth, as EPS have increased at an 11.8% annual rate over the last decade. This growth, along with an expanding payout ratio and a low interest rate environment, has made shares even more attractive for investors. This buying pressure has moved the forward PE ratio up to 20.5, compared with its historical 15.3 valuation number.

This appears high when looking at the chart, but really isn’t when compared to peers like McDonalds $MCD, Starbucks $SBUX, Texas Roadhouse $TXRH, Darden $DRI, and Yum Brands $YUM, who all sport even higher PE multiples.

Looking ahead, analysts are expecting EPS growth to continue at a high single-digit rate over the next 5 years. Between that growth and a forward yield from the regular dividend of nearly 3%, investors stand a good chance of seeing double-digit annual total returns going forward.

Dividend Growth Expectations

The dividend growth rate has slowed in recent years, as evidenced by the most recent increase of just 4.3% compared to the much higher historical rate. This isn’t a concern to me however, as management has simply taken a more reserved approach to returning capital to shareholders.

This was discussed by Senior V.P. and CFO Lawrence Hyatt during the Q3 2015 CBRL conference call (bold by me):

We have said that we anticipate going forward that our regular quarterly dividend which currently has a payout ratio in the low [60%] range would be growing roughly in line with the long-term growth of our earnings per share. Concerned about raising our regular dividend much further is that there tends to come a point where your dividend payout ratio gets, it’s difficult to convince the market that it’s sustainable. And we are mindful of not getting to that point.

As far as the opportunity to repurchase shares, as long as we have a 19.9% shareholder and we have a shareholder rights plan with a 20% threshold, and I’ll remind everyone that our shareholders overwhelmingly approved a shareholder rights plan with a 20% threshold, the view that we have is that we need to find alternatives to share repurchases to return capital to shareholders, which is the reason for our first special dividend that we announced this morning.

Mr. Hyatt also provided similar color on the dividend during the CBRL Q3 2016 conference call.

As mentioned above, there is currently a 19.9% shareholder, Sardar Biglari, who has previously tried to get access to the board and influence the capital return policy of the company. As a result, management pushed through a shareholder rights plan that limits individual shareholders to a maximum 20% stake.

Because of this policy, Cracker Barrel is no longer able to repurchases shares, as by doing so it would lower the outstanding share count and push Biglari Holdings over the 20% threshold.

So instead of putting extra cash towards buybacks, management has expanded the payout ratio to roughly 60% of earnings, and then pays out the remaining extra cash flows as a special dividend.

This gives the company cushion to maintain dividend growth should a recession cause profits to decline, while also allowing it to pay out the cash through discretionary special dividends. Should problems arise, the special payout can be ended, while the regular dividend can continue to be paid.

Looking at the numbers, analysts are expecting $8.21 in earnings during 2017. The recent dividend increase to $4.80 results in an expected payout ratio of 58.5%, which is in-line with the ~60% guidance. Add in the special dividend of $3.50 and we get a total payout ratio of 100%. This compares with a total payout ratio of 115% in 2015 and 108% in 2016.

On the surface, this might seem unsustainable, but Cracker Barrel is a well established operation with limited expansion and low operating costs. This results in high cash flows and limited capital expenditures, allowing greater return of cash to shareholders.

I suspect that with earnings growth expected to continue at a high single-digit rate, dividend growth should be able to continue marching higher as well.

Conclusion

Cracker Barrel once again came through with a nice dividend increase, and provided an increased special dividend to top it off. This bumps my yield on cost to 6.7% after just 4 years of ownership; a number that is likely to continue higher in the years ahead.

As management in unable to spend cash flows on share repurchases, Cracker Barrel should continue to be a nice investment opportunity for income investors. With an annual yield of 5% (when including the special dividend) and expectations of high single-digit growth ahead, I’m quite content holding my shares for the long run.

Thanks, and Happy Investing!

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