Darden Restaurants, Inc. (DRI) offers investors an attractive three-course meal: strong growth, a solid (and rising) dividend, and reasonable valuation.
The company recently posted better than expected results for its fiscal third quarter, marked by same-store sales growth and expanding margins. Both management and analysts are projecting strong double-digit EPS growth over the next two years. It is a Zacks #2 Rank (Buy).
Darden is also shareholder-friendly and has been buying back stock and raising its dividend. It yields 2.5%.
Moreover, shares are currently trading below the industry average and sport a PEG ratio near 1.0.
Third Quarter Results
Darden reported results for its fiscal third quarter on March 24. Earnings per share came in at $1.08, 3 cents above the Zacks Consensus Estimate. It was a 14% increase over the same quarter in 2010.
Sales rose 5.9% to $1.977 billion, also ahead of the Zacks Consensus Estimate of $1.969 billion. U.S. same-store sales growth were up 0.9%, driven by a 6.1% increase at LongHorn Steakhouse.
Sales from Darden’s three main segments were divided as follows:
Olive Garden: 45.9%
Red Lobster: 33.5%
LongHorn Steakhouse: 13.6%
Meanwhile, gross margin expanded from 23.7% of sales to 25.2% in the quarter, while earnings from continuing operations rose 12.5%.
Strong Growth Ahead
Following solid Q3 results, management slightly raised its earnings growth forecasts from between 17-18% to about 19%. Based on the Zacks Consensus Estimate for 2011, analysts expect 17% growth to $3.41 per share.
Double-digit growth is also expected to continue in 2012, with EPS of $3.83.
It is a Zacks #2 Rank (Buy) stock.
Returning Value to Shareholders
Darden has been rewarding shareholders through stock buybacks and aggressive dividend hikes. The company repurchased 2.3 million shares of its common stock in the third quarter and also pays a dividend that yields a solid 2.5%.
Darden has raised its dividend at a remarkable average annual rate of 38% over the last 10 years.
With solid earnings growth forecasts and a relatively modest 39% payout ratio, expect more hikes on the way.
Reasonable Valuation
The valuation picture looks very reasonable for DRI. Shares trade at 13.4x 12-month forward earnings, in-line with its 10-year median, and a discount to the industry average of 17.0x.
Darden also sports a PEG ratio of 1.1 based on a 5-year growth rate of 12.2%.
Conclusion
Darden Restaurants is a quality name with strong growth prospects. With a rapidly rising dividend and reasonable valuation, now could be a great time to get in.
Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.
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