Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Historically, Texas Roadhouse, Inc. (NASDAQ:TXRH) has paid dividends to shareholders, and these days it yields 1.9%. Should it have a place in your portfolio? Let’s take a look at Texas Roadhouse in more detail.
5 questions to ask before buying a dividend stock
When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:
- Is its annual yield among the top 25% of dividend-paying companies?
- Has it paid dividend every year without dramatically reducing payout in the past?
- Has it increased its dividend per share amount over the past?
- Is its earnings sufficient to payout dividend at the current rate?
- Will it be able to continue to payout at the current rate in the future?
Does Texas Roadhouse pass our checks?
The current trailing twelve-month payout ratio for the stock is 45%, which means that the dividend is covered by earnings. Going forward, analysts expect TXRH’s payout to remain around the same level at 47% of its earnings. Assuming a constant share price, this equates to a dividend yield of 2.0%. Moreover, EPS should increase to $2.49.
When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. Companies with strong cash flow can sustain a higher payout ratio, while companies with weaker cash flow generally cannot.
Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. The reality is that it is too early to consider Texas Roadhouse as a dividend investment. It has only been consistently paying dividends for 8 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.
Relative to peers, Texas Roadhouse produces a yield of 1.9%, which is on the low-side for Hospitality stocks.
Taking all the above into account, Texas Roadhouse is a complicated pick for dividend investors given that there are a couple of positive things about it as well as negative. However, if you are not strictly just a dividend investor, the stock could still offer some interesting investment opportunities. Given that this is purely a dividend analysis, you should always research extensively before deciding whether or not a stock is an appropriate investment for you. I always recommend analysing the company’s fundamentals and underlying business before making an investment decision. There are three important factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for TXRH’s future growth? Take a look at our free research report of analyst consensus for TXRH’s outlook.
- Valuation: What is TXRH worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether TXRH is currently mispriced by the market.
- Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.