Dividend-paying stocks lagged non-dividend-payers for most of 2018, but I suspect that situation will change in 2019. Still, it makes sense to seek out growth plays that also offer decent dividends, explains Chuck Carlson, dividend reinvestment expert and editor of DRIP Investor.
Darden Restaurants (DRI) offers such a growth-income platter for investors. The company has been able to generate steady growth from its bevy of brands, including Olive Garden and LongHorn Steakhouse. And the dividend yield of nearly 3% provides a nice boost to total-return potential.
With strong employment, rising wages, and favorable prices at the gas pump, consumers have more disposable dollars to spend on dining out, and Darden is a good choice to capture those dollars. The stock has been reasonably resilient throughout the market’s recent volatility and should outperform the broad market in 2019.
Darden’s restaurant brands include Olive Garden, LongHorn Steakhouse, Cheddar's Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, and Eddie V’s.
The company’s some 1,700 restaurants service nearly 400 million guests each year. The firm’s top revenue producer, Olive Garden, has been a consistent grower for the company.
Indeed, same-store sales have grown in each of the last 17 quarters and were up 3.5% in the fiscal second quarter of 2019 ended November 25. Check average increased 4.3% in the quarter, driven by 1.9% pricing and 2.4% menu mix.
LongHorn Steakhouse also had a solid quarter. Total sales grew 6.4%, driven by 3.5% growth from new restaurants and same-restaurant sales growth of 2.9%, the 23rd consecutive quarter of same-restaurant sales growth.
On the downside, Cheddar’s Scratch Kitchen brand saw 4% decline in same-store sales. Darden has made strides in improving the management team of this unit and is optimistic that a turnaround in sales will result from operating and management improvements.
For the quarter overall, total sales increased nearly 5% firm-wide on a blended same-restaurant sales increase of 2.1%. Darden is confident in the rest of the fiscal year, as the firm recently boosted its fiscal 2019 guidance for same-store sales and per-share earnings to 2.5% and $5.60 to $5.70, respectively.
Darden has been boosting its dividend at a healthy clip. The payout was increased 19% at midyear 2018 and is up nearly 34% over the last two years. Another double-digit increase is likely before year-end 2019.
Darden is a nice “Steady Eddie” stock, the type of stock that typically is not at the top or bottom of the leaderboard each year but one that grinds out nice returns over time with manageable volatility.
The stock, which has beaten earnings estimates in each of the last five quarters, is not cheap at roughly 19 times the company’s high-end guidance number for per share profits in fiscal 2019. Still, these shares warrant a premium valuation given their consistent performance.
