Seeking Alpha
Dividend investing, dividend growth investing, master limited partnerships, oil & gas
Profile| Send Message|
( followers)  

Over the last few years, Darden Restaurants (NYSE:DRI) has been attracting the attention of dividend growth investors. The company has been aggressively raising its quarterly dividend since 2008, with an average dividend increase of 23% per year. As of Dec. 1, the yield for Darden Restaurants is a tempting 3.78%. The company has also been buying back stock. Since 2010, Darden has bought back nearly 10 million of its shares outstanding.

On July 12, 2012, Darden announced that it had agreed to acquire Yard House USA, Inc. for $585 million in an all-cash transaction from private equity firm TSG Consumer Partners LLC. The brand will become part of Darden's Specialty Restaurant Group, which includes Bahama Breeze, Seasons 52, and Eddie V's. The transaction is expected to be dilutive to Darden's earnings per share in fiscal 2013 by approximately three to five cents and accretive thereafter. The acquisition of Yard House was completed on Aug. 29, 2012.

Click to enlarge images.

Darden recently revised its fiscal 2013 outlook to account for the impact purchase of Yard House. Darden still expects combined full-year U.S. same-restaurant sales growth in fiscal 2013 of approximately 1% to 2% at Red Lobster, Olive Garden, and LongHorn Steakhouse. It continues to expect to open approximately 100 to 110 net new restaurants in fiscal 2013. Darden expects total sales growth of between 9% and 10% in fiscal 2013 and anticipates earnings-per-share growth of 5% to 9%. As a result of the Yard House acquisition, Darden projects that share buybacks during fiscal 2013 will total approximately $50 million, which is down from the $200 million to $250 million of share buybacks it previously projected.

Q3 2012 Overview

Olive Garden's sales were $922 million last quarter, 4.3% higher than the prior year. This was driven by revenue from 40 net new restaurants and a 0.3% increase in U.S. same-restaurant sales. Red Lobster's sales were $660 million last quarter, 2.1% lower than the prior year. This was a result of a U.S. same-restaurant sales decrease of 2.6% that was offset somewhat by revenue from six net new restaurants. Longhorn Steakhouse's sales were $285 million last quarter, 12.7% higher than the prior year. This was driven by revenue from 34 net new restaurants and a U.S. same-restaurant sales increase of 3.6%. The Specialty Restaurant Group's sales last quarter were $163 million, 26.4% higher than prior year. This was driven by same-restaurant sales increases of 4.0% at The Capital Grille, 1.2% at Bahama Breeze, and 1.3% at Seasons 52; one net new restaurant at The Capital Grille, four net new restaurants at Bahama Breeze, and five net new restaurants at Seasons 52; and the addition of the 11 Eddie V's restaurants purchased on Nov. 14, 2011.

Darden reported revenue from continuing operations of $2.03 billion for Q3. This represents an increase of 4.8% compared from Q3 last year. Darden has been able to grow its revenue by 18% since 2010. Earnings per share from continuing operations for Q3 were 85 cents, a 9% increase from the 78 cents per share in Q3 last year. Earnings from continuing operations for Q3 came in at $111.0 million, which is a 3.7% increase compared to earnings from continuing operations of $106.8 for Q3 last year.

DRI Revenue Quarterly Chart

Darden has been able to increase its dividend an impressive average of 23% over the last five years. This TTM payout ratio has also increased to slightly under 50%.

DRI Payout Ratio TTM Chart

Taking a look at Darden's debt levels, we can see that while slightly higher, Darden has not had to issue much debt to fund its growth.

Conclusion

Darden has shown impressive dividend, revenue, and earnings growth. The company has managed to do this while not incurring a large amount of debt. I would, however, wait for a pullback in price. Q4 EPS will be impacted by charges related to the purchase of Yard House. This may provide an opportunity to buy shares at the 4% yield level of $50.00.

Source: Darden Restaurants Offers A 3.78% Yield And A 23% Dividend Growth Rate