Mmm... Bread Sticks and Dividends Are Back on the Menu

Just over a year ago, the pandemic made its way to the U.S., upending many aspects of life as we knew it, and we faced tremendous uncertainty. A number of dividend-paying companies either slashed their quarterly dividend payments or halted them entirely. At the time, we even saw the recently crowned Dividend Aristocrat Ross Stores suspend its dividend amid the uncertainty. Over the last few months we've witnessed the dividend payment spigots for some of those companies turn back on, but it's the recent dividend news from Darden Restaurants that could signal more good dividend news is ahead. Darden is the corporate entity that houses a number of well known, full-service restaurant brands including Olive Garden, Longhorn Steakhouse, Seasons 52, Bahama Breeze and upscale restaurants The Capital Grille and Eddie V's Prime Seafood. The company's portfolio ebbs and flows from time to time -- case in point in 2014 it sold Red Lobster and then in 2018 it added casual dining chain Cheddar's Scratch Kitchen. While each of those restaurant brands may offer differ cuisine at different price points, Darden brings a number of synergies across the board ranging from menu innovation to purchasing power and other scale advantages across its 1,822 restaurant locations, and technology. Let's remember, Darden's portfolio is the classic full-service restaurant, which means that up until the pandemic it was predominantly dine-in. As the pandemic hit and it was staring down the combination of seating restrictions and slumping demand that led its sales to turn negative, in March 2020 Darden paused its dividend and tapped its $750 million credit line in a move that brought its cash balances to just over $1 billion. During the ensuing months the company was able to leverage technology to pivot to mobile ordering as well as partner with delivery companies such as GrubHub . As Darden learned to maneuver in the pandemic, it reinstated a reduced dividend of $0.30 per share, a 66% cut compared to its pre-pandemic quarterly dividend of $0.88. During its recently reported February quarter results, Darden shared that for the quarter nearly 19% of total sales were digital and 50% of all guests checks were settled digitally. Another benefit of the pandemic was the company's ability to streamline its menu offerings, which reduced food waste and streamlined inventory. These and other steps helped Darden reduce its restaurant operating expense and return to both profitability and positive cash flow generation despite the year-over-year revenue drop in the February quarter. The name of the game here is operating leverage and these pandemic-led initiatives should result in higher margins as revenue and same-store comps return to pre-pandemic levels in the coming quarters. Circling back to the above, during the February quarter, Darden generated $240 million of free cash flow, leaving it with $990 million. That prompted the company's board to hike Darden's quarterly dividend back to $0.88, which at current levels equates to an annualized yield of 2.4%. If we look back at Darden's pre-pandemic history, the company has been inclined to boost its dividend on a regular basis since 2016. I suspect the company's newfound operating leverage likely means it will return to that as the economic recovery continues, vaccine counts continue to climb and dining restrictions are lifted further. Unpacking Darden's New Dividend Odds are Darden will be the first of many to announce the return of its pre-pandemic level quarterly dividend. Part of that is because of the hard work completed over the last few quarters that allowed it to happen. Another part is the timing, given its February quarter end that was reported recently. This could very well be a harbinger for further dividend hike or reinstatement announcements the next few months as companies report their latest quarterly results. Will all of the more than 600 companies that announced dividend cuts or suspensions during the June 2020 quarter be bringing that back to pre-pandemic levels? Probably not, but the ones that are able to do so likely re-tooled their business similar to how Darden did and means they are likely to be the ones we want to own going forward.

Mmm... Bread Sticks and Dividends Are Back on the Menu

Let's see how recent dividend news from Darden Restaurants could signal more good dividend news is ahead.

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