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A Three-in-One Stock

Darden Restaurants (DRI) has solid fundamentals, a strong chart and a nice dividend.

By Chloe Lutts


The Monopoly

The Universal Service Obligation

A Three-in-One Stock


I recently learned (not through experience) that it is illegal to send non-urgent mail through any service other than the U.S. Postal Service. At first I was surprised. I was even more surprised when I read that this law is actually enforced: Equifax was fined $30,000 in 1993 after a raid determined that the mail it had been sending through FedEx was not actually “extremely urgent.”

However, the more I read, the more this anti-competitive law began to make sense. The U.S. Postal Service has what is called a universal service obligation: It is required by the U.S. government to provide nationwide service. Furthermore, it is required to provide service at the same cost regardless of location--you can send a letter to your neighbor or to Hawaii with the same stamp. In 2009, the USPS tried to cut costs by eliminating the last remaining backcountry air mail route in the lower 48 states, serving the residents of a remote wilderness area in Idaho. But after the residents complained that they would have to travel 110 miles by boat to the nearest Post Office to pick up their mail, the Postmaster General reversed the decision, saying, “in view of the obligation to provide service to the American public, this contract should continue in its present form.” The USPS continues to spend $46,000 a year to provide the handful of residents there with once-weekly mail delivery by plane.

When this mandate is taken into consideration, the Post Office’s monopoly doesn’t seem so unreasonable. The monopoly is essentially a funding mechanism that allows the USPS to fulfill the universal service obligation. If a private company were allowed to compete with the USPS, it could cherry-pick the most profitable delivery routes and undercut the Post Office, leaving the USPS without crucial revenue to support less profitable services.

Of course, there are arguments against the Post Office monopoly as well. Opponents argue that if the monopoly were removed, private companies would step in to serve all customers, and rural customers would simply have to pay their true cost of delivery. Residents of more populous areas would also pay their true cost of delivery, which might be less, eliminating the cross-subsidy to rural residents. In my mind, this argument makes sense to the extent that people who choose to live in the backcountry should be prepared to bear the full costs of that decision.

What do you think?

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Today’s stock comes from the latest issue of the Dick Davis Dividend Digest, where it was recommended by J. Royden Ward, editor of Cabot Benjamin Graham Value Letter. Ward focuses on stocks that are undervalued, using the same system as Ben Graham and Warren Buffett. For his system, a company’s earnings and fundamentals are more important than its chart. So I took notice last week when he recommended Darden Restaurants (DRI). Not only does Ward think DRI is undervalued, the stock also has a decent chart: It gapped up from 50 to 52 at the end of June and is now building a sturdy-looking horizontal base. Plus, DRI yields 3.30%! It looks like a great pick for growth, value and income investors, which is something you don’t see every day. Ward’s write-up is below:

“Darden Restaurants shares are a bargain at 14.0 times our 12-month forward EPS estimate of 3.78. A strong U.S. economy could help Darden increase results more than expected. We believe the company’s shares will reach our Minimum Sell Price of 80.21 within the next one to two years. DRI is low risk. Based in Orlando, Darden Restaurants is one of the largest casual dining restaurant operators worldwide. The company has operations in the U.S. and Canada with a total of 1,894 restaurants. The company owns and operates restaurant chains primarily under the Red Lobster, Olive Garden and LongHorn Steakhouse names. The diversified mix of seafood, Italian and steak restaurants provides a unique blend in one company. After opening 70 new restaurants during the last 12 months, Darden is aiming to open 80 to 90 restaurants during the next 12 months. In addition, the company renovated one-third of its LongHorn Steakhouse restaurants during the past 12 months. We expect total sales to increase 8%, accompanied by an EPS increase of 11% during the next 12-month period with steady growth in future years. Darden recently increased its dividend by 34%, which now provides a generous 3.3% yield. Maximum Buy Price: 52.79. Minimum Sell Price: 80.21.”

Wishing you success in your investing and beyond,

Chloe Lutts
Editor of Investment of the Week

P.S. Discover the “gold standard” in dividend-generating investments with our latest special report. In it, we highlight the gold standard in dividend players. Our top 15 Dividend Aristocrat picks for 2011 are culled straight from the 200-plus investment advisories we follow here at Dick Davis Dividend Digest. These are must-own income investments for anyone serious about dividends. Get your copy of the report today!

Cabot Editor