Quality businesses can outperform the broad market. That partly explains how shares of full-service restaurant specialist Darden Restaurants (DRI 0.14%) have soared 38% in the past 12 months. For context, that is far better than the 11% gain the S&P 500 index posted during the same period.

Yet, even following that steep climb, the restaurant chain is still an attractive buy, especially for dividend growth investors. Let's dig into Darden's fundamentals and valuation to better understand why this is the case.

Brand power is driving growth

Since opening its first restaurant, The Green Frog, in Georgia in 1938, Darden Restaurants has ascended to the status of being the largest full-service restaurant company in North America. The company's restaurant portfolio consists of nine brands, including Olive Garden, LongHorn Steakhouse, and newly acquired Ruth's Chris Steakhouse. Thanks to the wide variety of brands, over 400 million guests visit its restaurants each year. 

Metric FY 2022 FY 2023
Blended same-restaurant sales growth rate (YOY) 30.9% 6.8%
Total company-owned restaurants 1,867 1,914
Net margin 9.9% 9.4%

Data source: Darden Restaurants. YOY = year over year.

Darden's total sales of $10.5 billion in fiscal 2023 (ended May 28) landed above management's original guidance of $10.3 billion (at the midpoint). What was behind this healthy top-line growth rate?

With inflation remaining well above the Federal Reserve's 2% target throughout the fiscal year, the budgets of consumers were stretched to the limit. Even so, more guests frequented Darden's restaurants than they did in the year prior thanks to its value proposition and diverse offerings. The company's same-restaurant traffic growth was 510 basis points higher than the industry overall, according to Chief Financial Officer Raj Vennam. Along with price hikes and new restaurant openings, Darden delivered 8.9% sales growth for the fiscal year.

The Orlando, Florida-based company recorded $8.00 in diluted earnings per share (EPS) during the fiscal year, up 8.1%. Due to the inflationary environment, Darden's total operating expenses rose at a faster rate than sales. And despite a reduction in Darden's share count through stock buybacks, the company's net margin contracted for the year.

Moving forward, the company should be able to keep expanding its restaurant footprint. Analysts estimate Darden's diluted EPS will rise 9.1% annually over the next five years.

A group of people eating at a restaurant.

Image source: Getty Images.

Respectable dividend growth can persist

When considering that Darden's 3.3% dividend yield is double the S&P 500's 1.6% yield, the stock should be appetizing to income investors. And with the quarterly dividend per share recently raised 8.3% to $1.31, Darden also offers solid dividend growth.

The good news for shareholders is that more of the same payout growth looks viable for the foreseeable future. Darden's dividend payout ratio should come in under 60% for fiscal 2024. That leaves the company with enough funds to open more restaurants, repurchase shares, and reduce debt too.

A great company at a cheap valuation

Darden is nowhere near the same bargain it was a year ago. But even following its 45% rally, it's still a good buy right now. Darden's forward price-to-earnings (P/E) ratio of 16.6 is markedly lower than the restaurant industry's average of 24.1. The combination of industry leadership, dividend growth, and value should have you thinking about adding the stock to your portfolio.