Darden Restaurants Inc (NYSE:DRI)

CAPS Rating: 2 out of 5

A publicly held casual dining restaurant company that operates Red Lobster, Olive Garden, Bahamas Breeze, and Seasons restaurants. The company owns and operates all of the restaurants in the United States and Canada.

Recs

21
Player Avatar truthisntstupid (90.35) Submitted: 7/21/2011 4:44:48 AM : Outperform Start Price: $42.98 DRI Score: -55.43

I made DRI a CAPS pick on Dec17, 2010. It was rated 2 stars by CAPS members. As of now, in the wee hours of July 21, 2011 (it's 1:45 AM here) it's still rated 2 stars.
This is where thinking for yourself comes in, people.
I've been meaning to do this for some time. You red-thumbers with start prices for Darden even below $20 will never give up, will you?
Really? You honestly think this is ever going to $18 again? Get real. Throw in the towel, already. Talk about ridiculous.
Darden closed today (well...ok, yesterday) at $53.07. With a dividend of $1.72 a year, that gives it a current dividend yield of 3.24%...according to CAPS, its average dividend yield over the last 5 years is 2%.
Gee. That dividend yield hasn't suddenly risen because of a falling stock price, now...has it?
Maybe...just maybe...it's THIS:

..........................................DIVIDENDS.................................................................

..........................................2/1....................5/1.................8/1..................11/1

2008................................$0.18............... $0.18.............$0.20...............$0.20
2009................................$0.20................$0.20.............$0.25...............$0.25
2010................................$0.25................$0.25.............$0.32...............$0.32
2011................................$0.32................$0.32.............$0.43

The dividend payout ratio, by the way, is currently 38%.

Before we go any further, let's have a look at "Morningstar's Take, from Morningstar.com:

"Darden Restaurants has separated itself from other participants in the $170B casual dining market through its ability to manage profitable core brands while developing emergent concepts. Darden's mature brands - Olive Garden and Red Lobster - have persevered despite a turbulent consumer environment, and we believe nascent chains like Longhorn Steakhouse provide attractive growth prospects. Although slower consumer spending will likely weigh on Darden's top-line growth during the next few quarters, we expect the firm to navigate the economic downturn and emerge as an even stronger player in the casual dining industry."

Hmm. Wonder when they wrote that?

.......................................EARNINGS PER SHARE....................................................

............2010.....2009.....2008.....2007.....2006.....2005.....2004.....2003.....2002.....2001...................
...........$2.84....$2.65....$2.55....$1.35....$2.16....$1.78....$1.36....$1.31....$1.30....$1.06

I'd say they're navigating pretty well so far....

With a dividend payout ratio of 38%, and a current dividend that is up 139% since 2008, yielding 3.24% as of yesterday's close, as far as I'm concerned, it's rated 2 stars by CAPS because of a faulty rating system giving too much weight to a few red thumbs that refuse to give up.
Think for yourself, brother. Don't let these guys do it for you. That's a mistake.
The 5-year dividend growth rate is 27.33%.
The last dividend increase, raising the quarterly payout from $0.32 to $0.43, was a whopping 34%.
Debt/equity is 0.8. Interest coverage is 7.3.
CAPS lists the P/E as 15.8, the 5-year high P/E as 34.5, and the 5-year low P/E as 5.
Return on equity, at about 24%, is much in line with the return on equity over the past 10 years, although they've made significant progress toward deleveraging.
I don't remember everything, but if you go to Morningstar.com and look, you will find that net margin is at a 10-year high.
Morningstar lists the P/E as slightly different from what I find here at CAPS. Morningstar lists the P/E at 16.5 - but Morningstar also lists a forward P/E - of 12.
Look at the earnings per share table again.
Morningstar lists the earnings per share for the trailing twelve months as $3.20.
Funny. Morningstar, with its glowing "Morningstar's Take", only gives DRI a 3-star rating itself.
But if you look further down the quote page, the consensus rating of 31 analysts for DRI is "1.3".
I'm not done.
We're first going to talk about this sometimes useful, sometimes useless little thing called the "current ratio".
Yup. Time was, before I read "Warren Buffet And The Interpretation Of Financial Statements", I'd have looked at Darden's current ratio of 0.5 and at that point my research would be DONE.
You can't look at it in isolation, though. Buy that book if you don't already have it.

Here's an excerpt:

"The funny thing about a lot of companies with a durable competitive advantage is that quite often their current ratio is below the magical one. Moody's comes in at .64, Coca-Cola at .95, Procter & Gamble at .82, and Anheuser-Busch at .88. Which, from an old-school perspective, means that these companies might have difficulties paying current liabilities. What is really happening is that their earning power is so strong they can easily cover their current liabilities. Also, as a result of their tremendous earning power, these companies have no problem tapping into the cheap, short-term commercial paper market if they need any short-term cash.
Because of their great earning power, they can also pay out generous dividends and make stock repurchases, both of which diminish cash reserves and help pull their current ratios below one. But it is the consistency of their earning power, which comes with having a durable competitive advantage, that ensures they can cover their current liabilities and not fall prey to the vicissitudes of business cycles and recessions."

Some of the companies mentioned in that excerpt have horded a little more cash recently (KO's current ratio is 1.10 now) but Procter & Gamble's current ratio is still around .8. ATT isn't hurting and their current ratio is .6.

I'm still not done. I have yet to put in MY 2 cents.

And here it is. All this paranoia about "rising commodity costs." Even Standard & Poors refers to worries about "rising commodity costs". S & P also gives DRI 3 stars.

I'm a cook at a very busy restaurant. Let me tell you something. You people, in general, are going to continue eating out more and more and MORE. If we need to raise prices you know what? You'll pay them! I think it's ludicrous to imagine that even as we spend hours and hours during lunch or dinner rushes unable to get off the cook line for even a minute, as people are overwhelming the kitchen crew, that many or at least some of our customers may be investors that would worry about our being unable to meet "rising commodity costs."

You have no idea just how ridiculous that is.

What? You're still with me? Well...I'm finally done.

Report this Post 14 Replies
Member Avatar truthisntstupid (90.35) Submitted: 7/21/2011 4:54:56 AM
Recs: 1

One more thing....this one is unrelated to investing....please, please leave a decent tip for our waitresses. God, those girls get cranky when you don't.

Member Avatar truthisntstupid (90.35) Submitted: 7/21/2011 1:28:57 PM
Recs: 0

A word about CAPS star ratings. Many all-stars and highly rated players adopt a "never close a pick in the red" strategy for this game. All-stars' picks carry more weight in determining a company's CAPS star rating.
This may have worked well for them in reaching their high ratings - but it also means you'd better do your homework.
A few all-stars that don't want to "close a pick in the red" can make a company's star rating absolutely retarded - as it has here.

Member Avatar truthisntstupid (90.35) Submitted: 7/21/2011 1:32:45 PM
Recs: 0

I really probably should have said as it PROBABLY has here.
That's the way I feel. If the shoe fits....

Member Avatar truthisntstupid (90.35) Submitted: 7/21/2011 6:28:56 PM
Recs: 2

Just looked through the entire scoreboard. I'll take back that "probably" now. People playing this game - especially all-stars, since their red thumb carries more weight - that have had this red-thumbed for years with start prices as low as $13 or $14. Quite a few below $20. This is how they play.
"Never close a pick in the red."
CAPS needs to address this somehow because the STAR ratings are CRAP.

Member Avatar truthisntstupid (90.35) Submitted: 7/21/2011 10:20:48 PM
Recs: 0

I'm being a little unfair, I guess. The CAPS star ratings aren't always crap. But hey! How do you know when you are or are not looking at another example like this one? Study, people. Develop your OWN analytical skills.

Member Avatar ikkyu2 (99.32) Submitted: 7/22/2011 3:42:02 PM
Recs: 0

CAPS star ratings are a measure of retail investor sentiment, like many other metrics designed to measure the same thing. They correlate with the stock's alpha unbelievably well - TMF proved this a few years ago - which is why we like the way they're calculated.

A lot of retail investors don't sell stocks that have dropped in value, either. The idea is called 'buy and hold'. Ever hear of it? It's out there and it affects stock pricing.

Member Avatar truthisntstupid (90.35) Submitted: 7/22/2011 3:55:30 PM
Recs: 0

ikkyu
I'm all about buy and hold. Red-thumbing a stock at $15-$20 that proceeds to do as well as DRI has and keeping it red-thumbed 3 years later when it has climbed to over $50 and the company is doing great, just because you're using a "never close a pick in the red" strategy is sheer buffoonery and makes a joke of CAPS star rating for that stock.

Member Avatar truthisntstupid (90.35) Submitted: 7/22/2011 4:40:39 PM
Recs: 0

To belabor my point, I believe that those red-thumbers using this strategy here causes an inaccurate reflection of investor sentiment. A company like this having only a 2-star rating doesn't exactly make the CAPS community look brilliant.

Member Avatar truthisntstupid (90.35) Submitted: 7/22/2011 5:54:09 PM
Recs: 1

People who red-thumbed this stock years ago between $12 and $22 that has no better reason for keeping it red-thumbed now than that they don't want to close a bad pick is a detriment to the rating system's ability to provide an accurate measurement of investor sentiment for this company.
Period.

Member Avatar truthisntstupid (90.35) Submitted: 7/23/2011 8:01:04 PM
Recs: 1

Well! Let's leave the red-thumbers with start prices at less than half the current price that couldn't write a *credible* pitch as to why they continue to leave this outstanding company that's doing so well red-thumbed to their own devices.

This is an update. How is DRI doing - for ME as a CAPS pick, and how well would it be working out for me if I had bought it in real life on Dec 17, 2010?

First, as in many of the pitches I've updated, we'll figure out what my actual original start price was, since CAPS adjusts the start price downward with each dividend payout. So let's do it. CAPS assumes the dividend to be reinvested at the ex-dividend day opening price, and calculates a "reduction factor":
1 / 1 + (amount of dividend/ex-dividend day opening price)
..............which is then multiplied by your current start price. The result is your new start price. YahooFinance figures the "adjusted" closing prices the exact same way!
SO.....

First, if I go to Yahoo!Finance and look up my start date, I'm going to look at 2 figures: the closing price and the "adjusted" closing price.
Here's what we do: The closing price for Dec 17 was $49.89, and the "adjusted" closing price was $48.82.
Since YahooFinance adjusts its "adjusted" closing price the same way CAPS adjusts your start price with each payout, the same ratio should apply.
So we'll divide the closing price for Dec 17 by the "adjusted" closing price for Dec 17, and multiply that by my current listed start price of $48.65.
It's easy:
($49.89/$48.82) X $48.65 = $49.72.
This a ballpark figure that will be awful close but not exact. There are rounding errors, because the amount of the dividend, when divided by the much larger ex-dividend day opening price, results in a 4-or-5 decimal figure that, when rounded to dollars and cents, loses a couple decimals needed to be precisely accurate
After looking up each ex-dividend date's opening price, and doing the math, I find that starting with $49.72 comes out a couple cents higher than my listed start price of $48.65.
The correct figure ends up being $49.70, and this is how my start price wound up at $48.65:
There were 3 ex-dividend dates since Dec 17, 2010:

.........................Amount of dividend..........Ex-dividend day opening price

1/6/2011...................$0.32...................................$45.99
4/6/2011...................$0.32...................................$48.35
7/7/2011...................$0.43...................................$53.31

Starting with $49.70, it comes out right,,,$48.65:
1 / 1 + ($0.32/$45.99) X $49.70 = $49.36
1 / 1 + ($0.32/$48.35) X $49.36 = $49.04
1 / 1 + ($0.43/$53.31) X $49.04 = $48.65
So my actual original start price = $49.70.

At $49.70, the dividend yield when I made this pick was 2.58% ($1.28 per share/$49.70)
That rocket boost of a 34% dividend increase with the latest payment now has my dividend yield on cost at
($1.72 per share/$49.70) = 3.46% yield on cost!!
Not bad - eh? And it's a very safe, rapidly growing dividend, well covered by earnings.
I do believe I would be very happy with this if it had been a real-life investment. A 2-star stock. HA! The next dividend boost may well have my yield on cost at over 4% if it wasn't just a CAPS pick.
There are diamonds like this everywhere, folks, if you learn how to find them. When half the CAPS community is bemoaning the fact that they "can't make money in this market", all I can do is shake my head.
Sharpen your prospecting tools and start digging. Learn to see what's hiding in plain sight. Geez.
No telling what my yield on cost would be for this stock in 4 or 5 years. Ya know what I'm sayin'?
That's all for now.

Member Avatar truthisntstupid (90.35) Submitted: 7/23/2011 8:10:21 PM
Recs: 1

Yeah...buy and hold....I happen to have heard of it.

Member Avatar truthisntstupid (90.35) Submitted: 7/23/2011 9:03:07 PM
Recs: 0

I neglected to mention how this is doing for me as a CAPS pick.
With a listed start price of $48.65, and an actual original start price of $49.70, 3 dividend payments have lopped $1.05 off my original start price in 7 months. When it goes ex-dividend again - in October 2011, a few months from now - my listed start price will drop down to somewhere in the neighborhood of $48.27 - give or take a few cents.
That's $1.43 off my original start price.
Whatever the current price does, my listed start price is headed in only one direction - DOWN!
This is what dividend investing does in CAPS.
Dividend investing is my strategy in CAPS, just as in real life.

Member Avatar truthisntstupid (90.35) Submitted: 7/24/2011 8:39:50 PM
Recs: 0

A few words more about "rising commodity costs." Just a few.

Use your head. Restaurants pay wholesale.
You pay retail at the grocery store.
Rising commodity costs will make it more expensive to buy groceries, too.

Bottom line: The cost of eating out relative to the cost of eating at home is not going to change much, and people are smart enough to figure that out.

Member Avatar truthisntstupid (90.35) Submitted: 10/13/2011 11:09:27 AM
Recs: 0

Well! DRI opened ex-dividend a few days ago @ $42.37, quite a bit lower than the $53 range it was trading in when I guessed that my new start price after the October ex date would be around $48.27 back in July.
So...1/ 1 plus ($0.43/$42.37) ...times $48.65...=$48.16. I was 9 cents off because of the significant dip. It's all good...

Featured Broker Partners


Advertisement