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There aren’t many places you can get a 3% yield, dividends growing by big double-digits, a plan to increase earnings 10% to 15% annually and decent meals from a variety of leading restaurants – all from the same company.

But Darden Restaurants (NYSE:DRI), with about 1,800 casual dining eateries, is all that. The world’s largest company-owned and operated restaurant enterprise, DRI’s best-known brands include Olive Garden, Red Lobster, and LongHorn Steakhouse. Its smaller, still emerging chains are Bahama Breeze, Seasons 52 and The Capital Grille.

DRI released quarterly results about a month ago. Highlights? EPS missed by a couple of cents, same-store sales were down but continued to beat the industry, the company’s near-term growth forecast improved, management affirmed their longer term growth plan and the Board hiked the dividend 28%.

I guess all this was pretty bad because the stock fell 6% that day and stills sits there. And I guess that makes it a good time to review the long-haul investment case for DRI.

DRI, generally considered among the best-managed casual restaurant operators, estimates it can add 50% more restaurants, about 800 to 1,000 units, over the long run. This will build their base for sales and profits to something around 2,700 restaurants from the current 1,800. Over time, that means midcap DRI will become a bigger company that’s worth more money.

DRI plans about 70 net new restaurants this year, which will expand total units a prudent 4% year-over-year, a pace that annualizes to a 10 to 15 year growth plan. Remodeling, productivity initiatives and other improvements to existing restaurants, especially Red Lobster and Longhorn Steakhouse, should fuel additional growth in the near-term.

Meanwhile, shareholders collect the current 3% yield from a dividend that’s grown by double-digits annually since 2005. This year’s 28% boost looked a lot like last year’s 25% bump, so DRI knows how to pile on an extra helping. Better yet, the company reiterated that its strong cash flow both allows it to fund future growth and return a “meaningful amount” of cash to shareholders.

DRI’s payout ratio hovers around 35%. Return on equity rings in at 25%, with slightly less debt than equity on the balance sheet. And with a P/E ratio under 14, the market values DRI barely above its Great Recession multiple. During the 2003-2006 recovery, the P/E averaged 18. The stock suffered a tough couple of months lately, but beyond that its total returns thumped the S&P 500 over every trailing time period from YTD through the past 15-years.

Of course, like most investments, DRI isn’t for everyone. After all, the always-reliable golden arches (NYSE:MCD) might make a fine investment instead, or maybe even Yum Brands (NYSE:YUM), the poster child for emerging market promise and stupefying debt.

And cautious investors won’t have to look far to find something to worry about with DRI. Consumers still struggle, unemployment stinks, the company had a come-to-nothing-quarter, planning isn’t the same as executing, restaurants are a rough business, and so forth.

But so far, problems like those have hurt its competitors more than DRI, allowing the company to gain additional market share. So long-term investors with a bon appétit for a high quality company, with a rising 3% dividend and a nutritious growth recipe, might take a taste of DRI.

For more details on DRI and its long-term growth plan, see my Seeking Alpha article “Darden Restaurants: Sweet Growth, Tasty Dividend” published February 22, 2010, as well as the “References and Links” section provided below.

References and Links

Disclosure: Author is long DRI

Source: Darden: Growth and Dividends Stay on the Menu