Thursday, December 6, 2012

DARDEN RESTAURANTS - DRI - Buy, Sell, or Hold?

bahama breeze facade
bahama breeze facade (Photo credit: goodiesfirst)

Update on Dividend Machine Darden Restaurants (DRI)

Even simple investing strategies like dividend machines present challenges.  This week, one of the dividend machines I have profiled and that I own took one big hit.(2012 DRI post)  (2011 DRI post)The stock dropped from $52.50 per share to $47.77 per share.    While I always stress that income investors need to concentrate on income and not on capital gains (or losses), these kinds of moves in a stock are troubling.

Moreover, Yum brands, which is in a similar business, had a good report.  What should we do?  Should we sell DRI and buy YUM.   Should we sell DRI and just keep the cash?   Tell me Madam, what to do?

I can only tell you what I will do; you have to make your own decisions.   Here is how I approach these decisions.

First I look at the history of the company to see if these kinds of price swings have happened before and what effect did it have on income.   DRI’s price per share on 4/30/2007 was $45.57.  So if you bought then you are up a touch.  However, on 10/31/2008 when the market tanked, DRI closed at $18.29 … ouch!   If you bought at $18.29 you are up a mighty 160 percent…nice!   But DRI provides more drama.  DRI closed at $46 on 4/19/2012 and sank to $39 on 6/21/2010.   The point of looking at this history is to determine if this price drama is unusually or typical and my take on this DRI is a volatile stock.  Since price volatility is common in this stock, I feel a little better about holding on. (2011 update on DRI)

Stock price variations are second to income for those of us who use dividend payments to live on.  Let us review the dividend history during these previous difficult times.  Darden Restaurants started paying dividends in 2004.  If you owned it on 4/30/2007 your quarterly dividend would have been $.04 per share.  If you owned it on 10/31/2008, your quarter dividend would have been $.20 per share.   This is a nice increase in income although it would not have come close to making up for your paper loses.  If you owned Darden during the 4/19/2010 through 6/21/2012 period your quarterly income would be $.32 per share another nice increase.  And if you own it today, you should receive their next quarterly dividend of $.50 per share in January, 2013.  This was another nice increase.

YUM brands and Brinker (EAT) yield only half of Darden and less than 3% which is the minimal amount I can stomach from a company I use as a dividend machine.  

With the news that Darden has not successfully executed some recent changes that were designed to increase earnings, will Darden continue to pay and increase the dividend? Income investors, dividend data are the most important facts you need to consider. Darden typically announces their dividend amount and date about the middle of December.  

I am going to wait until I hear that announcement before I make any moves.  I will sell if the dividend is cut, I will add to my position if the dividend is as expected ($.50 per share) and the stock price stays under $50.00 and I will just hold what if have if the stock price moves above $50.  I will also use the stock volatility to sell calls when possible. (post on DRI call)

Even simple income strategies like dividend machine investing have challenges, but with a structured, disciplined approach, decisions are not that hard to make.

Very Truly Yours,

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