Are the food supply and restaurant businesses staging a comeback?
Neither has been the hottest segment on the stock exchange of late, but two recent dividend raises by segment mainstays McCormick (MKC 0.59%) and Darden Restaurants (DRI -0.45%) indicate confidence in the future. Here's a closer look at whether this optimism means one or both of these stocks is worth buying.
1. McCormick
McCormick, the stock market's king of spices and condiments, declared a fresh dividend raise in advance of the release of its second-quarter results late last month. The company's new quarterly payout is to be $0.37 per share, which is 9% higher than its predecessor.
This was a surprise to exactly no one who's observed the company over the years. McCormick is a Dividend Aristocrat, after all, and even before it achieved that status it was a steady dividend payer for decades.
These days, McCormick is a tale of two revenue streams. Its restaurants business is doing quite well, thank you. That's because customers are flocking back to their favorite dining spots now that we're (hopefully) slowly emerging from the coronavirus pandemic. Yet for similar reasons, people are getting out of their homes more, and this is having the opposite effect on the company's sales to that consumer segment.
This, combined with other factors such as the war in Ukraine and a coronavirus-plagued Chinese economy, meant an overall top-line slump. In its most recently reported quarter, McCormick's total net sales sagged by 1% on a year-over-year basis to just over $1.5 billion. Meanwhile, inflation drove up costs and pushed down net profit, which on non-GAAP (adjusted) standards plunged 30% to just under $130 million.
The company will continue navigating through choppy waters. It's guiding for a 3% to 5% increase in net sales this year over last, but much of this will likely come from price hikes. Per-share adjusted net income growth should be slightly negative to 1% higher at most.
While I think McCormick has a solid niche in its business, I think the short- to medium-term future for the company is one of readjustment. It will likely settle into what we hope will be a post-coronavirus, post-war global market. At the moment, though, I don't think its potential is strong enough to make it a buy. As for the dividend, better-yielding titles from companies with greater potential are readily available.
McCormick's dividend raise kicks in on July 25, and shareholders of record as of July 11 will receive the enhanced payout. At the most recent closing stock price, it would yield 1.8%.
2. Darden Restaurants
The Great Return to Restaurants is helping boost some key fundamentals for Darden, which operates a portfolio of dining brands anchored by Olive Garden and including LongHorn Steakhouse, Yard House, and The Capital Grille. Buoyed by this, the company declared a 10% dividend raise concurrent with its latest set of quarterly results.
The company actually did relatively well during the pandemic, an absolutely frightening time to be in the restaurant industry. Management made several deft moves, including the enactment of a two-quarter pause in dividend payouts and the effective use of a credit facility to help stay afloat financially.
As diners finally emerged from their homes and started going out again, Darden's recovery began in earnest, and is still rolling. In its fiscal 2022, which concluded at the end of May, the company's total sales rose 14% year-over-year, on the back of same-restaurant sales that climbed by almost 12%.
In fact, those annual sales (of $9.63 billion, to be exact) topped the four-quarter period just prior to the coronavirus outbreak by 7%. And Darden's profitability was up too; stripping out the considerable tax benefits and expenses booked in 2022 and 2021, net profit for the former year rose by almost 20%.
The recovery story isn't going to feed Darden forever, but the company is projecting continued growth. It's forecasting a 6% to 8% increase in total sales for fiscal 2023, and anywhere from flat to 8% growth in diluted, per-share net earnings. The company's restaurants seem to do well even in challenging times, so I think those numbers are achievable even if inflation continues to bite and the economy sputters.
I like Darden's prospects. Another attractive element is what we can characterize as its high-yield dividend -- now topping 4.1% thanks to that recent raise. As this is from a company that hasn't been stingy to its shareholders, I think the dividend will at least be maintained if the coronavirus pandemic doesn't roar back too aggressively. This stock is certainly worthy of consideration as a buy.
Darden's dividend raise is to take effect on Aug. 1; investors of record as of July 8 are eligible for this. Again, the new payout would yield 4.1% at the current stock price.
