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Why It Might Not Make Sense To Buy Darden Restaurants, Inc. (NYSE:DRI) For Its Upcoming Dividend

Simply Wall St
·3 min read

Readers hoping to buy Darden Restaurants, Inc. (NYSE:DRI) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 7th of January in order to be eligible for this dividend, which will be paid on the 1st of February.

Darden Restaurants's next dividend payment will be US$0.37 per share. Last year, in total, the company distributed US$1.48 to shareholders. Based on the last year's worth of payments, Darden Restaurants stock has a trailing yield of around 1.2% on the current share price of $119.12. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Darden Restaurants

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Darden Restaurants lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If Darden Restaurants didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It distributed 39% of its free cash flow as dividends, a comfortable payout level for most companies.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Darden Restaurants reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Darden Restaurants has delivered an average of 4.0% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Remember, you can always get a snapshot of Darden Restaurants's financial health, by checking our visualisation of its financial health, here.

The Bottom Line

Has Darden Restaurants got what it takes to maintain its dividend payments? It's hard to get used to Darden Restaurants paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Darden Restaurants and want to know more, you'll find it very useful to know what risks this stock faces. Case in point: We've spotted 2 warning signs for Darden Restaurants you should be aware of.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.