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Will Darden’s good historical dividend growth of 22% continue?

Xun Yao Chen

Retirement picks: 4 restaurant stocks with dividends (Part 6 of 9)

(Continued from Part 5)

Darden’s dividends and earnings

Another stock that many investors might have been holding or found attractive is Darden Restaurants Inc. (DRI). The company recently raised its quarterly dividend from $0.50 to $0.55 in July 2013, a 10% increase. At the current price of $46.42, the stock’s dividend yield equates to 4.74%, which is higher than McDonald’s Corp. (MCD), Yum! Brands Inc. (YUM), Brinker International Inc. (EAT), or the Consumer Discretionary Select Sector SPDR ETF (XLY). However, the company had missed earnings when it raised dividends in July. Just a few days ago, the company saw first quarter earnings decline by 37% compared to the same quarter last year.

Impressive historical growth, but falling rapidly

Darden Restaurants Inc. (DRI)’s historical dividend growth has been pretty impressive: it’s even better than McDonald’s Corp. (MCD) or Yum! Brands Inc. (YUM), boasting an annual growth rate of 21.79% since 2009. This is higher than Yum! Brands Inc. (YUM)’s ~14% and McDonald’s Corp. (MCD)’s ~11%.

While the recent dividend increase was positive, dividends growth has been falling, reaching just 7.32% between 2012 and 2013. 1 We’ve seen a similar pattern among McDonald’s (MCD) and Yum! Brands Inc. (YUM), but nothing like a more than 50% decline from 2012 and an 80% decline from 2011.

Dividend payout now at 64%, higher than MCD or YUM

For the last nine years, Darden’s dividend growths were partially funded by increased payout, rising from just ~4.5% of earnings in 2004 to as high as 64% in 2012. This doesn’t mean earnings didn’t grow. Throughout fiscal year 2003 to 2012, earnings per share had grown from just $1.30 to $3.50—a 169% increase.[2. The coverage ratio in 2006, for example, is inflated because the company had to incur some "abnormal" or "extraordinary" expenses.] But the outlook for Darden hasn’t looked favorable. While McDonald’s Corp. (MCD) and Yum! Brands Inc. (YUM) have seen somewhat flat coverage ratios, Darden’s kept rising from 37% in 2010 to 64% in 2012 (fiscal year 2013). So now we have to ask ourselves, can historic dividend growth maintain?

  1. Note the years presented are one year behind the fiscal year data. So year 2013 actually refers to June 2013 to May 2014 (the company’s fiscal year 2014).

Continue to Part 7

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