Investing in established companies with generous dividend policies can be a great strategy for investors seeking rising passive income. That's because such an investment philosophy can help investors sleep easier at night, knowing that their cash flow isn't subject to the whims of the fickle stock market.
Darden Restaurants (DRI +2.01%) is arguably a dependable dividend payer worth a look for dividend investors for three reasons.
NYSE: DRI
Key Data Points
1. A strong brand portfolio is propelling growth
Darden Restaurants has come a long way since its humble beginnings in 1938 in Waycross, Georgia. Founder Bill Darden's commitment to quality customer service built a successful foundation that the company still maintains to this day. That's how Darden has grown to eight restaurant brands serving over a million guests each day, led by its Olive Garden Italian Restaurant and LongHorn Steakhouse brands.
The restaurant company's total sales surged 9.4% higher year over year to $2.5 billion for the second quarter ended Nov. 27. What factors led to this robust top-line growth for the large-cap company?
Darden's dedication to coupling service with top-notch food creates a strong customer experience. And because customers come back for more of that experience, the company's same-restaurant sales increased 7.3% over the year-ago period in the quarter. Paired with a 1.9% rise in the number of company-owned restaurants to 1,887, this explains why total sales rose at a nearly double-digit clip during the quarter.
At the bottom line, Darden dished out $1.52 in diluted earnings per share (EPS) for the second quarter, which was 2.7% higher year over year. As a result of inflationary headwinds, the company's operating expenses grew at a faster clip (11%) than total sales. This led to a nearly 100-basis-point decline in the net margin to 7.5%. But a 5.7% reduction in Darden's outstanding share count partially offset this dip in profitability. These elements explain how the company's diluted EPS growth lagged behind total sales growth during the quarter.
With fewer than 2,000 restaurants throughout North America, Darden has plenty of room to open new locations in the years ahead. This is why analysts project that the company's diluted EPS will grow at 9% annually over the next five years.
Image source: Getty Images.
2. The dividend can keep growing
Darden's 3.4% dividend yield can satisfy the appetite of nearly all income investors, especially when measured against the S&P 500 index's 1.7% yield. The company should also be able to grow its dividend moving forward.
This is because Darden's dividend payout ratio will come in at approximately 62% for the current fiscal year set to end in May. That's more than enough capital for the restaurant holding business to open more restaurants, execute share repurchases, and repay debt. This is why I am confident that Darden will deliver annual dividend hikes in the range of 8% to 10% for the medium term.
3. A wonderful business at a discount
Based on its fundamentals, Darden is thriving. Topping it all off, the stock's valuation makes it a buy at this moment.
Darden's forward price-to-earnings ratio of 16.2 is materially below the restaurant industry's average of 24.7. Even adjusting for the fact that the company's earnings growth prospects are lower than the restaurant industry's average of 13.1%, the stock is a good value.
