Red Lobster sale proceeds retire debt and increase share buyback

Market Realist

Overview: Starboard Value's activist position at Darden (Part 5 of 7)

(Continued from Part 4)

Proceeds from sale of Red Lobster

Activist investor Starboard Value has launched a proxy fight to gain control over the board of Darden Restaurants (DRI), after opposing the sale of the company’s Red Lobster seafood chain to private equity company Golden Gate Capital. The activist fund currently owns an ~8.8% stake in the restaurant company.

Darden recently said it has completed the repurchase of ~$900 million of a previously announced $1 billion debt retirement leaving ~$1.6 billion of debt on its balance sheet. The remaining $100 million of debt is expected to be retired later in August, 2014. Darden used after-tax proceeds from its sale of Red Lobster to consummate the debt retirement and to initiate a $500 million accelerated stock buyback (or ASB) program. Earlier, the company entered into agreements with Goldman Sachs and Wells Fargo Bank to repurchase an aggregate of $500 million of its common stock under the ASB program.

Darden has the highest dividend yield among peers

In March, the company said it sought to maintain a “balanced approach to capital allocation.” It said it has returned $4 billion to shareholders through share repurchases and dividends from the beginning of fiscal year 2004 through fiscal year 2014. The company doubled its dividend over the past four years. In June, 2013, Darden raised its quarterly dividend by 10% to $0.55 per share, or $2.20 annually. The dividend yield currently stands at 4.44%, higher when compared to peers such as Cheesecake Factory (CAKE), Texas Roadhouse (TXRH), Brinker International Inc. (EAT), and DineEquity (DIN). Darden is also a component of the iShares Select Dividend ETF (or DVY) and the Consumer Discretionary Select Sector SPDR Fund (or XLY).

In its latest earnings release, Darden said that in addition to strengthening the company’s credit metrics, with the lower debt levels and reduced outstanding share count, Darden expects to maintain its current quarterly dividend of $0.55 per share, or $2.20 annually. The company had said in March that it expects to target around a 70%–75% dividend payout ratio that would be reduced over time to around 50%–60%.

 

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