Company Description: Darden Restaurant Inc. operates the Red Lobster, Olive Garden, Bahama Breeze, Seasons 52, LongHorn Steakhouse and Capital Grille chains.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
DRI is trading at a premium to all four valuations above. The stock is trading at a 46.8% discount to its calculated fair value of $93.37. DRI earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
DRI earned one Star in this section for 3.) above. DRI earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2004-2007, 2005-2008, 2006-2009, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1995 and has increased its dividend payments for 9 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
DRI earned a Star in this section for its NPV MMA Diff. of the $26,408. This amount is in excess of the $2,600 target I look for in a stock that has increased dividends as long as DRI has. The stock's current yield of 4.43% exceeds the 3.31% estimated 20-year average MMA rate.
Memberships and Peers: DRI is a member of the S&P 500. The company’s peer group includes: Brinker International, Inc. (EAT) with a 1.9% yield, The Cheesecake Factory Incorporated (CAKE) with a 1.2% yield, and Cracker Barrel Old Country Store, Inc. (CBRL) with a 3.9% yield.
Conclusion: DRI earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks DRI as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $111.62 before DRI's NPV MMA Differential decreased to the $2,600 minimum that I look for in a stock with 9 years of consecutive dividend increases. At that price the stock would yield 2.0%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,600 NPV MMA Differential, the calculated rate is 7.6%. This dividend growth rate is lower than the 15.0% used in this analysis, thus providing significant margin of safety. DRI has a risk rating of 2.25 which classifies it as a Medium
risk stock.
DRI's Red Lobster and Olive Garden concepts have among the strongest brand name recognition in the industry. In a December 19th release, the company said it would sell or spin off its Red Lobster chain, which along with Olive Garden has been a drag on profits. It also said it would suspend the opening of new Olive Garden locations and limit new LongHorn Steakhouse restaurants. Clarence Otis, Darden’s chairman and chief executive, acknowledged that the casual-dining segment was under pressure.
The company expects to complete the divestiture of Red Lobster in fiscal first quarter 2015. The divestiture will help focus resources on more profitable brands like LongHorn Steakhouse and Capital Grille. In addition, DRI is working on its comprehensive strategic plan. However, the costs associated with the strategic plan are hurting its bottom line.
Although DRI is trading below my calculated fair value price of $93.37, I will remain on the sidelines due to its high free cash flow payout (101%) and its high debt to total capital (56%). Both of these metrics improved since my last review, but remain well in excess of my maximums.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in DRI (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: [DRI] [EAT] [CAKE] [CBRL]
