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CompanyDarden Restaurants (NYSE: DRI)
Submitted bytruthisntstupid
Member Rating61.33
Submitted on7/21/2011
Stock Price at Recommendation$48.65
Company Profile
Star Rating (out of 5)**
HeadquartersOrlando, Fla.
IndustryRestaurants
Market Cap$7.3 billion
Industry Peers

Brinker International (NYSE: EAT)

Buffalo Wild Wings (Nasdaq: BWLD)

Chipotle (NYSE: CMG)

Source: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:
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. ...

Darden closed [Wednesday] 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

 2/15/18/111/1
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%. ... 

Earnings per Share

2010200920082007200620052004200320022001
$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% ...
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. …

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 Buffett 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 & Poor's 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. …

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The Motley Fool is investors writing for investors. Dan Dzombak did not have a position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words. The Motley Fool owns shares of Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of Chipotle Mexican Grill and Buffalo Wild Wings. Motley Fool newsletter services have recommended creating an iron condor position in Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.