It's not a coincidence that companies with the most illustrious brands tend to be the best at rewarding shareholders. This is because with significant brand recognition comes pricing power, which pushes revenue, profits, and dividends higher over time.
Hershey (HSY -0.53%) and Darden Restaurants (DRI -0.28%) are two consumer-oriented businesses that could continue to do well for shareholders in terms of dividend growth. Let's dig deeper to discover why.
1. Hershey: A winning business strategy
For much of its corporate history, Hershey has been most known for its leading U.S. market share in the chocolate industry via brands like Milk Duds, Kit Kat, and Mounds. The company is focused on maintaining its leadership in the highly competitive chocolate category through new product launches. But years ago, Hershey began strengthening its better-for-you and salty snack product lineup to sustain its impressive growth. Acquisitions of Dot's Pretzels and Pretzels Inc. as well as SkinnyPop popcorn have cemented the company's status as the No. 2 player in the U.S. snacking category.
Hershey's efforts to provide consumers with a wide range of products are paying off. Investors don't need to look any further than the company's most recent 15%-plus dividend boost as confirmation of this argument. Two likely factors can explain the confectioner's confidence in its business: First, Wall Street views its future favorably. Analysts expect non-GAAP (adjusted) diluted earnings per share (EPS) to climb by nearly 9% annually for the next five years. Second, with a dividend payout ratio that is poised to be below 47% in 2023, double-digit annual dividend growth could continue for at least a few more years.
Investors can scoop up shares of Hershey and its market-beating 2.2% dividend yield (versus the S&P 500 index's 1.6% yield) at a forward price-to-earnings (P/E) ratio of 21.3. Put another way, the world-class business is trading about in line with the confectioner industry average forward P/E ratio of 21.1. This valuation makes Hershey stock the most intriguing that it has been in months for dividend growth investors at the current $220 share price.
Image source: Getty Images.
2. Darden Restaurants: Cashing in on shifting consumer preferences
In recent years, many consumers have begun to prioritize experiences over material items: A 2019 survey conducted by leading global experiential advertising agency Momentum Worldwide found that 76% of consumers would rather spend money on experiences than material possessions. Operating over 1,900 full-service restaurants under nine brands like Olive Garden and LongHorn Steakhouse, Darden Restaurants should benefit from this change in consumer inclinations.
Suffice to say, the restaurant chain's combination of excellent food and customer service keeps its guests coming back, as witnessed by an increasing revenue that has comfortably sped past pre-pandemic levels. Darden has room for price increases and projects that it will open an additional 50 stores in its fiscal year 2024 ending in May. This is why analysts think Darden's earnings will increase by a little under 10% annually over the next five years.
With a dividend payout ratio positioned to clock in under 60% in fiscal year 2024, I believe more dividend raises like its most recent 8.3% increase lie ahead for shareholders. Considering that Darden's 3.3% dividend yield is twice that of the S&P 500 index, this is an ideal combination of starting income and growth prospects.
Dividend growth investors can scoop shares of the restaurant stock at a forward P/E ratio of 16.4, which is materially less than the industry peer average of 23.7. This deeply discounted valuation makes Darden a no-brainer buy at the current $160 share price, in my opinion.
