Recs

0

Will Darden Restaurants Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Eating out is part of American culture, and central to that culture are chain restaurants like the ones that Darden Restaurants (NYSE: DRI  ) operates. Throughout the country, you can find Darden's Red Lobster, Olive Garden, LongHorn Steakhouse, and other offerings, adding up to about 2,000 restaurant locations. Unfortunately, the economic recession played havoc on dining out as household budgets were squeezed to the breaking point. Has the recovery made things better for restaurant stocks? Below, we'll revisit how Darden Restaurants does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Darden Restaurants.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $7 billion Fail
Consistency Revenue growth > 0% in at least four of past five years 4 years Pass
  Free cash flow growth > 0% in at least four of past five years 2 years Fail
Stock stability Beta < 0.9 0.84 Pass
  Worst loss in past five years no greater than 20% (30.1%) Fail
Valuation Normalized P/E < 18 18.18 Fail
Dividends Current yield > 2% 3.7% Pass
  5-year dividend growth > 10% 30.2% Pass
  Streak of dividend increases >= 10 years 8 years Fail
  Payout ratio < 75% 47.1% Pass
       
  Total score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Darden Restaurants last year, the company has dropped a point. A rise in valuation is responsible for the loss, but few shareholders would be disappointed with about a 25% gain in the stock's price over the past year.

Darden has had to deal with tough times for quite a while. Toward the end of last year, the company slashed its earnings outlook for 2012 based largely on weak comps from Olive Garden, and it didn't look like there was much relief in sight for restaurant companies generally. Then in its most recent quarter, Darden saw same-store sales declines at both Red Lobster and Olive Garden, and it took 100 new restaurants to produce a total sales increase of less than 4%. In general, the weak economy has driven customers toward Chipotle (NYSE: CMG  ) and other lower-price-point restaurants.

But 2012 has been a bit kinder to Darden and its peers than many expected. Although Ruby Tuesday's (NYSE: RT  ) attempts to keep selling and administrative costs down hasn't led to much of a lasting bump in its shares, both Cracker Barrel (Nasdaq: CBRL  ) and Darden have seen some clear improvement in cash flow and other important metrics. Moreover, with operating margins that top those of Chili's operator Brinker International (NYSE: EAT  ) , Darden has potential.

For retirees and other conservative investors, Darden's dividend looks nice, but its debt level introduces a lot of risk. Unless you're willing to gamble, you should probably choose a dividend stock in better condition than Darden for your retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

Add Darden Restaurants to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Darden Restaurants and Chipotle. Motley Fool newsletter services have recommended buying shares of Chipotle. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2026611, ~/Articles/ArticleHandler.aspx, 12/21/2014 11:03:39 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated 1 day ago Sponsored by:
DOW 17,804.80 26.65 0.15%
S&P 500 2,070.65 9.42 0.46%
NASD 4,765.38 16.98 0.36%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/19/2014 4:10 PM
DRI $57.37 Down -0.35 -0.61%
Darden Restaurants… CAPS Rating: **
CBRL $134.61 Down -0.10 -0.07%
Cracker Barrel Old… CAPS Rating: ****
CMG $651.42 Down -4.18 -0.64%
Chipotle Mexican G… CAPS Rating: ***
EAT $57.11 Down -0.27 -0.47%
Brinker Internatio… CAPS Rating: **
RT $6.43 Down -0.24 -3.60%
Ruby Tuesday, Inc. CAPS Rating: *

Advertisement