Dividend Analysis: Cracker Barrel – Should I Buy, Sell, or Hold?

Dividend stocks are part of our early retirement plan. I’ve owned a number of dividend paying stocks for years and I’ll have the opportunity to harvest some gains accumulated next year thanks to capital gain harvesting. Today I want to explore one of my largest holdings that I need to make a decision on next year: Cracker Barrel. Do I immediately buy back the same stock or invest in that same stock? Should I sell it and invest in something else? Lets look at the company and stock.

Related Post/Disclosures: Investing in Financial Independence

Background

I started buying Cracker Barrel stock in 2012 when I caught a piece of business news talking about an activist investor getting involved in the company. Cracker Barrel was a familiar brand to me, I was a big fan of the store between somewhat hungover breakfast there at 1pm in college and using a location up the road from my old office for years to meet clients for breakfast. The lines this store could command on a Sunday for breakfast were beyond impressive, but I had never looked at the stock.

Initial Investment Thesis: I read through the activist investor case and financials and quickly agreed this was a company to buy. Cracker Barrel owned owned most of their locations outright(usually in a valuable interstate interchange), carried low debt compared to the industry, but had expanded quickly at the expense of existing store sales growth. The company openly fought the activist investor, but fought the investor by calling him a bad actor and not refuting too many of his financial points.

The company responded by slowing growth, focusing on improving same store sales, and turning over long-entrenched management. Then they rapidly increased their dividend to return capital to shareholders, winning over the other 80% of shareholders and successfully keeping the activist off the board. I started buying the stock in the $65 range and added to the position all the way up to $150/share. Here is a breakdown of their earnings and dividends over that time (Fiscal Year End for CBRL is August).

Year	Earnings	Reg Div	Spec. Div	Total Dividends	Payout Ratio
2013	$4.90	$2.50		$2.50	51.02%
2014	$5.51	$3.50		$3.50	63.52%
2015	$6.82	$4.20	$3.00	$7.20	105.57%
2016	$7.86	$4.30	$3.25	$7.55	96.06%
2017	$8.37	$4.70	$3.50	$8.20	97.97%
2018	$10.29	$4.90	$3.75	$8.65	84.06%
2019	$9.27	$5.10	$3.00	$8.10	87.38%

The company started paying a special dividend in 2015 and has continued that through the current year. At their current price of around $155, this equates to a 5.22% annual yield. For the investors like me who bought in at $65/share, we’ve experienced a 240% gain and are currently being paid a dividend equal to 12.4% of original cost. A nice investment! The share price reached $170/share in June of 2016 and has since traded between $150 and $180/share for the last three plus years.

What Is Happening Now?

Activist Involvement & Share Price: The company’s earnings growth and efficiencies per store have likely been maximized and the activist investor has slowly been selling their 20% stake. The activist’s last correspondence with the organization encouraged them to pay a special dividend at the same level as before and to stop pursuing a fast-casual restaurant concept. The activist investor encouraged the company to return more capital to shareholders, likely either through more debt on the company or pursuing a sale/leaseback approach with the company’s real estate. In fact, the company actually made an offer to buy their activist’s shares with debt on the company, which was rebuffed when the investor told the company to make that same offer to all shareholders through an enhanced buyback program. The company has chosen a different route and the activist has slowly sold down his shares, accelerating the exit after this last ditch effort in March of 2019.

How Can The Company Grow Earnings Per Share? The company appears to have different options to grow their earnings per share: Reduce their share count (and possibly take on debt to do it), grow the existing brand, or grow through new concepts. The business decisions of this have to be balanced with the idea that their main brand sells both breakfast and the experience of “country nostalgia” and rise of healthier eating options could lead to a negative outlook of their core business. My personal preference would be for the company take on some long term debt and use the proceeds to reduce the number of outstanding shares. The company’s stock has an implied earnings yield of 5.8% and the company can at 4% or less, immediately creating an positive event for the shareholders.

What Choice Did The Company Make?

Cracker Barrel announced on July 23rd a $140mil non-controlling investment in Punch Bowl Social, an urban bar concept. Based on what I can understand from the conference call, the ownership is greater than 50% (and yet non-controlling?) and will have to be consolidated into Cracker Barrel’s financials, yet they did not provide financial details of the transaction to investors and declined when pressed on their most recent conference call. I find it a little concerning that a rural/interstate value restaurant chain decided the next logical step in their corporate evolution is to buy roughly half of an urban bar concept. They made this decision around the time of announcing a lower special dividend for 2019 then compared to 2018 and releasing earnings that show no shares have been bought back.

Last week Cracker Barrel then announced the acquisition of Maple Street Biscuit Company for the cost of thirty six million dollars. I was again disappointing with the lack of transparency in the press release. They gave vague numbers about revenue per store, net profit margin, and number of locations. If their disclosed generic numbers are accurate, the company is stating they paid thirty six million for a company that generated $4.7mil in cash flow last year. This is a far more reasonable acquisition in terms of both price paid and buying something that is a complimentary concept to their existing brand. My only pause was that the earnings release said it would be neutral to earnings per share in 2020. Had they instead bought back $36mil in outstanding stock, it would have given me around an $0.08/share boost to EPS permanently.

In addition to these two acquisitions, share count actually grew slightly from 2018 to 2019 even though the company passed a new buyback plan due to restricted stock issued.

What About Executive Pay?

Speaking of restricted stock units being issued, I dove into the recently released proxy statement to try to figure out why the share count is going up even though the share price has been stagnant. Cracker Barrel includes equity awards in its executive compensation, but issues these awards as restricted stock units and in my opinion doesn’t really tie these awards to any meaningful shareholder return metric. The proxy statement specifically says “….RSU Grant if the Company’s TSR performance over the three-year performance period is between the 25th and 75th percentiles of the Index “. This means the executives get 100% of their award for being anywhere above the bottom 25% of the mid-cap index and 75% of the mid-cap index in total shareholder return. In my opinion this isn’t meaningful performance based compensation, just additional salary disguised as a performance based stock awards.

As a shareholder, I would prefer the executive management receive equity indexed option awards. If the company’s total shareholder return falls below 50% of the index, then I believe management should be paid zero in equity awards. I did not earn any additional money for taking a single stock risk, therefore I don’t believe the executives should earn anything else. On the other side, if they earn greater than 50% of the index in total shareholder returns, they should be paid exponentially for their superior performance. A confident leadership team and board of directors should want this type of pay structure and it aligns their compensation more directly with shareholder performance. Unfortunately this issue is not unique to Cracker Barrel and RSUs are used by many companies once share price begins to languish.

Part of me is tempted to make a trip to the music city next month and listen to their annual meeting, but its unclear from what I’m reading if the shareholders will be allowed to have a question and answer session.

So What Should I Do?

I’ve enjoyed owning a stock that pays me a 5%+ qualified dividend, especially a company that carries a low level of debt, sells a low cost product, and would perform okay in a recession when people trade down from expensive travel. My struggle is the share price has languished for more than three years and management’s response has been to buy a complimentary concept (which I’m okay with), but then also make a significant venture capital style investment in a non-related type of business. The lack of transparency around the financials of both of these companies has been concerning, especially when the alternative of a higher dividend or share buybacks create a direct and immediate benefit to me as a shareholder. Cracker Barrel is currently just over 4% of our investment portfolio and I have a decision to make on this company.

*Update on 10/24

I decided to go do some important “market research” and try out this Maple Street Biscuit Company. I was impressed! I thought it was a solid menu and a small chain that could benefit from the infrastructure provided by a larger parent organization. Proof of the site visit is below!

Update: 3/27/2020:

The Covid19 Pandemic was not good for Cracker Barrel’s business, but specifically not good for Punch Bowl Social. Here is a recap of what happened since I wrote the post:

• Management adjusted their earnings and incurred negative EPS charges due to “revisions” with Punch Bowl Social in the last two reports
• Management dodged detailed questions by analysts, refused to respond to a letter sent by it’s largest shareholders, and declined to answer me with questions around the metrics of this purchase. Included in the analyst calls were questions about why a recently opened Punch Bowl Social failed
• Management promised to disclose this information at an Analyst/Investor day in June. This was quickly cancelled in early March, well before the Covid19 outbreak became a national story.
• Punch Bowl Social temporary closed all locations in March and disclosed it was in violation of its lender covenants. Cracker Barrel announced they would not be rescuing the company and is taking a $133 million charge to earnings.
• Cracker Barrel deferred its dividend until stores can be reopened. The cost of issuing the dividend was around $25mil/quarter, so this acquisition essentially cost shareholders five quarters worth of cash that could have been used to continue to pay shareholders and buffer against this shut down.

Individual investing is tough. One final note is occasionally there will be these heated articles written about stock buybacks. My warning: Be careful what you wish for. Acquisitions have cost me far more as an investor than any stock buyback has. Removing stock buybacks could leave us as investors exposed to more deals like this.

I might be making a trip to Nashville to voice my displeasure if/when the company has their next public meeting. I believe investors should still know the details around the purchase price paid and financial metrics of Punch Bowl Social at the time of purchase.

What do you think we should do? Please comment and leave your thoughts below.