Darden’s (DRI) long-term growth record has been excellent. Fiscal year 2007 (ended May 30, 2007) saw $2.53 in EPS and $0.46 in annual dividends. Fiscal Year 2012 came in with 41.8% higher earnings and $1.86 in yield.
Dividend growth investors had a love fest with this one ever since the spin-off from General Mills back in May, 1995. Darden’s recent swan dive from almost $58 to Wednesday’s $47.20 has brought the stock back to just below where it was trading on June 18, 2007. This fine company’s shares have now completed a 66-month round trip to nowhere.
What can be learned from the chart above? Plenty. Value Line notes that Darden has a 10-year median P/E of 14. Buyers back at 2007’s peak paid too much. At 18.8x trailing earnings and less than a 1% yield the stock was too richly valued to expect good returns.
The high points of 2011 and 2012 were also set with DRI trading for above normal valuations based on Darden’s own trading history. It is not surprising that the stock underperformed from those moments in time, designated with red stars on the chart.
Conversely, the three great buying opportunities, marked with green stars, all occurred at bargain multiples with generous yields of from 4.22% to 5.45%.
The biggest takeaway is the obvious one. Profits were made on the "buy." Traders just couldn’t be sure how well they’d done until they finally sold.
I’m not keen on the macro-environment for the casual dining industry at present. Economic weakness, upcoming employee health care cost increases and food price inflation are all straining profit margins. Couponing has been prevalent although Olive Gardens, Red Lobster and other Darden brands have avoided the dreaded Groupon so far.
A further sell-off to around the $42 to $44 mark might discount the entry price enough to make even a doubter give Darden a shot again. That would represent a still-secure yield of 4.5% to 4.8% and a P/E near 11.5x.
That would take Darden back to a valuation better than anything since the past recession’s low points. Keep an eye on DRI and hope for another step downward to allow for starting a new position.
The Trade: Place limit orders to Buy DRI in the $42 to $44 range.
Disclosure: No position
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