Shares in Darden Restaurants (NYSE:DRI) are down 13.17% year to date and are now trading at $47.21, just slightly above the 52 week low of $43.56. The company reported disappointing 4th quarter results, which sent shares tumbling. This has caused the dividend yield to reach 4.66%, which is very high considering the industry average dividend yield stands at 2.0%.
DRI data by YCharts
The company has recently sold Red Lobster for a price of $2.1 billion, $1 billion of which will be used to reduce Darden Restaurants' long-term debt. Darden's long-term debt stands at $2.48 billion and will be reduced by approximately 40% as a result. Furthermore, the company has announced it will be using part of the proceeds of the Red Lobster sale to reduce the number of outstanding shares. DRI will buy back $500 million worth of its own stock, which is equal to 8% of the current $6.25 billion market cap.
Diluted earnings per share in the most recent fiscal year were $2.15, which is a lot lower than the $3.12 the company reported one year earlier. Analysts are forecasting earnings per share to reach $2.25 in the current fiscal year, with a further increase to $2.49 expected in fiscal year 2016. This means DRI is trading at 19.0 times expected earnings for next year and 21.0 times this year's expected EPS. This is a pretty high valuation considering the forward P/Es competitors are trading at. For example, you can get DineEquity (NYSE:DIN) at 18.1 times expected earnings for the current fiscal year, while Denny's Corporation (NASDAQ:DENN) is currently trading at a forward P/E of 18.9. Revenues for the current fiscal year are expected to reach $6.69 billion, which puts Darden's forward P/S ratio at 0.93, well above its 5-year average of 0.8.
DRI Dividend Per Share (Quarterly) data by YCharts
Considering EPS estimates I wouldn't expect to see Darden's dividend grow too much, if at all, for the current and next fiscal year. However, at a yield of 4.66%, investors will get paid a very decent amount for their patience. In its most recent quarterly report, the company stated it expects to continue paying a $0.55 quarterly dividend. If analyst expectations for EPS are correct, this will give DRI a payout ratio of 97.8%, which will decrease to 88.4% assuming the dividend remains at the same level.
The sale of Red Lobster gives Darden Restaurants an opportunity to pay off a large portion of its long-term debt. Furthermore, the company will be spending $0.5 billion on share repurchases, which should boost EPS growth. At 21 times expected earnings , shares in DRI are far from cheap, and although the 4.66% dividend looks very appealing, the high payout ratio will likely prevent the company from raising it until EPS grows significantly. Darden's price to sales ratio is well above historical averages. A return to the 5-year average P/S ratio would require a drop in market cap of $900 million, which would put shares at a price of $40.45. I won't be buying DRI at this time but a drop to $40 or lower would in my opinion be a good reason to buy.
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