The board of Darden Restaurants, Inc. (NYSE:DRI) has announced that the dividend on 1st of August will be increased to US$1.21, which will be 10.0% higher than last year. This makes the dividend yield 3.8%, which is above the industry average.
Darden Restaurants' Payment Has Solid Earnings Coverage
If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Darden Restaurants' dividend was comfortably covered by both cash flow and earnings. This means that a large portion of its earnings are being retained to grow the business.
The next year is set to see EPS grow by 2.9%. If the dividend continues on this path, the payout ratio could be 60% by next year, which we think can be pretty sustainable going forward.
The company has a long dividend track record, but it doesn't look great with cuts in the past. The first annual payment during the last 10 years was US$1.72 in 2012, and the most recent fiscal year payment was US$4.40. This means that it has been growing its distributions at 9.8% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Darden Restaurants might have put its house in order since then, but we remain cautious.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Darden Restaurants has impressed us by growing EPS at 15% per year over the past five years. Shareholders are getting plenty of the earnings returned to them, which combined with strong growth makes this quite appealing.
We Really Like Darden Restaurants' Dividend
In summary, it is always positive to see the dividend being increased, and we are particularly pleased with its overall sustainability. The company is easily earning enough to cover its dividend payments and it is great to see that these earnings are being translated into cash flow. Taking this all into consideration, this looks like it could be a good dividend opportunity.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 1 warning sign for Darden Restaurants that investors should take into consideration. Is Darden Restaurants not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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