By some measures, 2016 was the worst year for the restaurant industry since the Great Recession.

There are many reasons for the downturn, including intensifying competition from food delivery services, and falling cost of groceries. In addition, higher wages are further pressuring restaurants’ bottom lines.

Not surprisingly, restaurant stocks have reflected the industry downturn.

For example, shares of DineEquity (DIN) closed at $51.66 on Monday, May 8th, representing a drop of 38% in the past one year. It has lost one-third of its value just since the beginning of 2017.

The upside of DineEquity’s falling share price is that it has elevated its dividend yield to rare territory. DineEquity has a 7.5% yield, making it one of 295 stocks with a dividend yield exceeding 5%.

While sky-high dividend yields can sometimes signal an upcoming dividend cut, DineEquity generates enough cash flow to pay its dividend, and fund its turnaround initiatives.

Business Overview

Times are certainly tough in the restaurant industry. 2016 ended on a very weak note—fourth-quarter same-restaurant sales fell 2.4%, including a 4.3% decline in December.

Same-restaurant sales is a way of measuring performance of restaurants that have been open at least one year.

It is an important gauge of the industry’s health, because it shows the ongoing viability of a restaurant, after the initial buzz of an opening wears off.

The fourth quarter was the worst for the restaurant industry in over five years. As a result, some have even dubbed it a “restaurant recession”.

DineEquity, owner of IHOP and Applebee’s, is a perfect example of the deterioration among sit-down eateries.

While IHOP is doing fairly well, with only a slight downturn last year after two consecutive years of strong growth, Applebee’s is in decline.

In 2016, IHOP and Applebee’s same-restaurant sales fell 0.1% and 5%, respectively. This prompted the company to close 17 more Applebee’s restaurants than it opened last year.

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Source: 2016 Annual Report, page 30

The problems facing DineEquity mirror those in the retail industry, in that Internet-based competitors have enabled delivery of nearly everything consumers desire to their homes.

A big factor in DineEquity’s decline is that grocery prices are falling, which gives consumers added incentive to cook at home.

When they do eat out, they’re largely still eating in. Instead of going to a restaurant, consumers are increasingly choosing online delivery services that bring food to their doorstep with the touch of an app.

Essentially, the companies in the cross-hairs of the changing consumer trends, are those with a large brick-and-mortar footprint–such as DineEquity.

The good news is that DineEquity is still very profitable. For the year, DineEquity had earnings-per-share of $5.33, down just 3.4% from the previous year.

The decline was fairly modest, as falling comparable sales was partially offset by cost cuts, and share repurchases.

2017 is going to be another tough year, as the company is set to invest significantly in turnaround initiatives. However, it has a good chance at returning to earnings growth in 2018. And, in the meantime, its dividend is covered with cash flow.

Growth Prospects

While things look bleak, DineEquity has a plan to return to growth. It involves optimizing its restaurant count, investing in new services, and improving sales at Applebee’s.

DineEquity will pursue 20-30 net closings for Applebee’s in 2017, but will open 75-90 new IHOP restaurants, mostly in the international markets.

The investments DineEquity is making to better compete in the new restaurant landscape, are expanding its digital platform, and enhancing to-go services. These moves are designed to capitalize on consumers’ desire for quickly-prepared meals, instead of going inside a restaurant and sitting down at a table.

DineEquity is also working on proprietary packaging technology to enable to-go for IHOP. Breakfast is very difficult to get right for delivery. But if DineEquity figures it out, it could be a compelling catalyst, given the strength of the IHOP brand.

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Source: 2016 Baird Conference Presentation, page 5

Moreover, while 2017 earnings will be impacted by multiple one-time expenses, this will make it easier to grow earnings in 2018.

For example, DineEquity’s first-quarter earnings-per-share declined 42%.

One of the reasons for this, was that it incurred $9 million in non-recurring cash severance and equity compensation charges, related to the ouster of its previous Chief Executive Officer.

In addition, DineEquity will invest $10 million in 2017 on stabilization initiatives, which will not repeat in 2018.

Using adjusted earnings-per-share, which exclude such one-time items, DineEquity earned $1.22 per share in the first quarter. This was a 23% decline, but more than covered its dividend.

Competitive Advantages & Recession Performance

One of the reasons why start-up food delivery services have found so much initial success is that the restaurant industry is highly competitive, with relatively low barriers to entry.

That said, DineEquity has a few competitive advantages. First, is that it has scale: DineEquity has more than 3,700 restaurants across 18 countries, and 3 U.S. territories.

Economies of scale help give it a high level of profitability, which could help it outlast the rise of online delivery services, many of which are losing money and shutting down.

Alas, there is hope for sit-down restaurants. The appeal of food delivery startups is that they allow consumers to order and receive food just by opening an app on their smartphones.

While food delivery startups do not have to pay the expenses associated with operating physical restaurants, they are also learning how expensive it is to compete for (and retain) customers when utilizing a purely digital business model.

The added benefit of DineEquity’s highly profitable business model, is that it allows the company to keep prices low. For example, IHOP offers several menu items for less than $10.

This value proposition should serve DineEquity well, if and when the next recession hits. DineEquity sailed through the Great Recession:

• 2008 earnings-per-share of $1.42
• 2009 earnings-per-share of $2.40
• 2010 earnings-per-share of $1.91
• 2011 earnings-per-share of $3.89

From 2008-2011, earnings-per-share more than doubled.

As a result, DineEquity could outperform in a recession.

Valuation & Expected Total Returns

The most compelling argument for investing in DineEquity is its valuation and dividend yield, which could generate strong total returns for investors.

DineEquity stock currently trades for a price-to-earnings ratio of 9.7, based on 2016 earnings-per-share. If earnings stabilize and return to growth, investors could earn significant returns from a rising valuation multiple.

Separately, earnings growth and dividends will provide returns. A base-case projection of DineEquity’s total returns could be as follows:

• 1%-2% net sales growth
• 2%-3% share repurchases
• 7.5% dividend yield

Under this scenario, investors could earn 10.5%-12.5% total annual returns, plus any additional returns from expansion of the price-to-earnings multiple.

Importantly, DineEquity covered its dividend with sufficient cash flow. Last year, DineEquity generated $113 million of free cash flow. Its needed $67 million for dividends, which left $55 million to repurchase shares.

The company would have to incur a significant deterioration from present conditions, before the dividend would be in danger. DineEquity could always curtail share repurchases to preserve the dividend, if it had to.

Final Thoughts

Falling same-restaurant sales across the restaurant industry have caused widespread panic. In turn, investors have sold off restaurant stocks, such as DineEquity.

To be sure, DineEquity is not immune from the industry downturn, and there is no guarantee its turnaround efforts will be successful.

However, for investors looking for a deep-value, high-yield dividend stock, DineEquity is on the menu.