3 Dividend Growth Stocks to Bet On the Great Pandemic Migration

The pandemic set off a wave of migration in the U.S. With things like remote work more commonplace than ever before, people are moving to warmer states and less-packed suburban areas. States like California and New York saw a net loss of households last year, while areas like Texas and Florida welcomed more residents. Higher mortgage rates will no doubt slow some movement this year, but lower cost-of-living states remain attractive in inflationary times.  

This is shaking up the business landscape too. Companies that operate in suburban or rural areas can thrive as a result, in spite of less-than-ideal economic conditions (inflation, labor shortages, and the like). Tractor Supply (NASDAQ: TSCO), Texas Roadhouse (NASDAQ: TXRH), and Texas Instruments (NASDAQ: TXN) all boast steadily rising dividends and have a clear growth trajectory. Here’s why each company looks like a solid bet on the “great pandemic migration.”

Tractor Supply: The rural lifestyle gets a big boost

Tractor Supply is a top retail stock worth betting the farm on — or at least part of the farm. As its name implies, the company caters to rural America, especially households that enjoy the farming and ranching lifestyle.

Of course, the retail industry has been far from perfect this year. Inflation among basic expenses (especially food and energy) has many families drastically altering their monthly budgets. Big-box stores have been cutting sales and profit outlooks for 2022 as a result — but not Tractor Supply. Second-quarter sales were up 8.4% year over year, driven by comparable-store sales growth (a blend of foot traffic and average guest ticket size) of 5.5%. Earnings per share rose 10.7% from the year prior.  

Tractor Supply expects to generate a very healthy operating profit margin of 10.2% for full-year 2022. This compares favorably to other retailers, many of which are struggling to climb above a mid-single-digit operating margin. With its strong profitability, Tractor Supply is returning excess cash to shareholders. It repurchased $188 million of stock in the second quarter. The dividend currently yields 1.9%, and the annual payout has increased more than 180% over the last five years alone.

After the second-quarter update, Tractor Supply stock trades for about 20 times full-year 2022 expected earnings. It’s a reasonable sticker price for this best-in-class retailer. This is a top bet on the rural market with a proven track record of generating profitable growth.  

Texas Roadhouse: Inflation bites, but growth continues apace

The last few years have been incredibly difficult for restaurants. First came the pandemic lockdowns, then labor shortages caused tremendous operational challenges. Now add in sky-high food and packaging inflation to the mix.

Texas Roadhouse has not been immune to these headwinds. The company reported commodity inflation of 14.4% in the second quarter. This was partially offset by comparable-store sales growth as more people kept eating out at the company’s suburbia-based chain with menu price increases certainly helping in a big way. Nevertheless, earnings per share are up only 8% through the first half of this year on a revenue gain of 18%.  

It’s worth noting earnings can be sensitive to changes in the company’s event schedule. For instance, Roadhouse’s annual managing partner conference was in the second quarter versus the third quarter last year, which lowered year-over-year comparable profitability so far in 2022. At any rate, though economic conditions aren’t in favor of the restaurant business, Texas Roadhouse is doing well and still slowly expanding its footprint of steakhouses with 58 new store openings expected this year (including its Bubba’s 33 concept).  

If and when these inflationary headwinds die down, this chain’s profitability could stage a big rebound. In the meantime, management has been using its positive cash flow to repurchase stock — $213 million during the first half of 2022. The dividend also currently yields 2.1%, and the payout has more than doubled from where it was five years ago (excluding the brief hiatus in 2020). For the patient investor, Texas Roadhouse still looks like a solid bet on America’s move to the suburbs with a reasonable valuation of 23 times expected 2022 earnings.

Texas Instruments: A bet on manufacturing with a technological twist

Texas Instruments (TI) is a top industrial electronics manufacturer with a management team that prioritizes operational efficiency. It has posted 12% average annual growth in free cash flow per share since 2004, an absolutely epic run that has led to massive market-beating returns.

But how is this a bet on the great pandemic migration? Well, while TI is a global operation, much of its chip fabs (the actual manufacturing facilities) are domestic, with fabs in and around the greater Dallas, Texas, area and a recently acquired fab in Lehi, Utah. The company is breaking ground on a brand-new fab in Sherman, Texas (about an hour north of Dallas).  

Eventually, TI thinks this new fab will be one of four in Sherman and will directly employ up to 3,000 people. Talk about the need for some new families to move into the area! It’s a huge investment that will cost about $30 billion once it’s all said and done.  

The reason for this massive investment on a suburban area of the Lone Star State? Industrial processes are in need of computing intelligence. Everything from automobiles to healthcare equipment are gobbling up more chips, and TI is expanding to meet the demand. Estimates point toward global spending on semiconductors to reach $1 trillion by the end of this decade, and TI (and its employees and shareholders) will no doubt be a beneficiary of this growth.  

Bear in mind investing in the chip industry can be highly cyclical. Years of fast growth can be followed by a year of lean sales. But over time, Texas Instruments has proven its ability to roll with the punches and steadily grow. The stock currently trades for 19 times forward earnings estimates, and it’s also attractive to those seeking income. The stock sports a yield of 2.6% as of this writing, and the payout is up nearly 560% over the last decade. This is another worthy addition to a basket of stocks to bet on the great pandemic migration.

Nicholas Rossolillo and his clients have positions in Texas Roadhouse. The Motley Fool has positions in and recommends Texas Instruments and Texas Roadhouse. The Motley Fool recommends Tractor Supply. The Motley Fool has a disclosure policy.

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