Smart Dividend Portfolio Edition #43: Savoring Income

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Dear Investor,

Welcome to the 43rd edition of TipRanks’ Smart Dividend Portfolio & Newsletter.

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Market-Moving News: January 13, 2025

Stocks registered losses for the second straight week following the latest economic data, most of which strongly surprised on the upside. The job market report showed a significant increase in nonfarm payrolls and a decline in the unemployment rate to 4.1% from 4.2%. Meanwhile, the UoM Consumer Sentiment index reflected a rise in inflation expectations, consistent with the price trends within the ISM Services PMI report, which also came in stronger than expected.

The apparent economic resilience, coupled with hints at possible reacceleration in inflation, led investors and analysts to voice concerns that the Federal Reserve may pause rate reductions in the first half of the year. Fed Governor Michelle Bowman said that inflation has risen “uncomfortably above” the Fed’s long-term target, while still presenting stubborn upside risks. Moreover, minutes from the latest central bank meeting echoed this sentiment, indicating an almost unanimous inclination among policymakers to hold the rates steady in January.

The labor data reflected continued wage gains notably higher than the inflation rate, which is a strong positive for consumer sentiment and overall economic growth. At the same time, robust economic activity is supportive of the corporate earnings. However, interest rate concerns outweighed these considerations, and a surge in the benchmark 10-year Treasury yields weighed on stocks.

Investor focus will shift to earnings this week with the start of the Q4 2024 reporting season. Large banks are expected to help the season get off to a strong start on Wednesday, with high expectations for net interest income thanks to a steepened yield curve.

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This Week’s Quality Dividend Stock Idea

Darden Restaurants (DRI) is a full-service restaurant company, operating several restaurant chains across North America. The company serves over 400 million of visitors annually, offering casual and fine dining experiences tailored to diverse customer preferences.

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History of Casual Dining

Founded in 1938 by Bill Darden as The Green Frog in Waycross, Georgia, the company has grown through strategic acquisitions and innovative concepts. Its early success with Red Lobster led to nationwide expansion in the 1970s, and by 1995, Darden became an independent, publicly traded company after spinning off from General Mills. The introduction of Olive Garden in 1982 solidified its position as a leader in the casual dining industry, driving consistent growth.

Today, Darden Restaurants operates over 2,150 locations across North America, offering various casual and fine dining experiences through brands like Olive Garden, LongHorn Steakhouse, Yard House, Ruth’s Chris Steak House, Cheddar’s Scratch Kitchen, The Capital Grille, Chuy’s, Seasons 52, Eddie V’s and Bahama Breeze.

With a market capitalization exceeding $21 billion and annual revenues of nearly $11.6 billion, DRI ranks #383 on the 2024 Fortune 500 list of the largest U.S. corporations by revenue.

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Strategic Growth and Efficiency

A key pillar of growth in the restaurant industry is diversification, and Darden has employed this strategy by strategically acquiring complementary brands. In 2007, the acquisition of Rare Hospitality brought LongHorn Steakhouse and The Capital Grille into its portfolio, strengthening its foothold in the steakhouse and fine dining segments.

In 2014, Darden streamlined its operations by divesting from Red Lobster, enabling a sharper focus on its core brands. This strategy paved the way for further growth, as the company acquired Cheddar’s Scratch Kitchen in 2017, adding a casual dining concept to diversify its offerings.

Continuing its expansion, Darden acquired Ruth’s Chris Steak House in 2023, integrating 80 fine dining locations that boosted its revenue and market presence. The momentum carried into October 2024, when the company finalized an all-cash deal to acquire Chuy’s Holdings for $605 million, marking its latest move to expand into new dining categories and successfully including Chuy’s network of 100+ restaurants in Darden’s portfolio.

Strategic site selection drives Darden’s long-term success. Before entering a market, the company employs advanced analytics to evaluate demographics, competition, site visibility, and traffic patterns. This meticulous approach ensures optimal placement and performance.

Darden’s scale provides significant cost advantages through centralized procurement, reducing ingredient and supply expenses. Operational efficiencies, like streamlined kitchen processes and improved labor productivity, further enhance profitability. The company also embraces technology, offering online ordering, delivery partnerships, and loyalty programs to meet evolving consumer needs and boost sales.

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Financial Performance Supports Expansion

Darden invests in new locations, remodeling, and acquisitions to maintain its growth trajectory. Its brand diversity and disciplined operations ensure resilience to economic fluctuations and consistent free cash flow generation. The company has a history of prudent financial decisions, including a $900 million debt reduction in 2014.

DRI’s current leverage is high, but typical for large restaurant chains and is not seen as risky by leading credit rating agencies, as reflected by the investment-grade ratings assigned to the company: “Baa2” at Moody’s and “BBB” at S&P and Fitch. Particularly, Fitch praised Darden’s “sizable revenue base, strong free cash flow and liquidity, its disciplined financial policy, and its proven ability to outperform the broader casual dining segment.”

Darden generates strong FCF, growing 5.1% over the past three years, while its operating cash flows cover the lion’s share of its debt. Its interest coverage ratio, with EBIT covering interest expenses many times over, reflects sound debt management.

Darden’s robust cash flows, disciplined debt management, and steady growth highlight its ability to balance elevated leverage with financial stability and long-term flexibility. The company’s ROE and ROA, along with its operating and net profit margins, rank in the top 25% of its industry, reflecting exceptional capital efficiency and strong profitability.

DRI’s revenues have grown at a CAGR of 10.5% over the past three years, while its earnings per share increased by 7.7%. In FQ2 2025, sales rose 6% with same-restaurant sales up 2.4%, while adjusted EPS increased 10.3%. The company surpassed analyst consensus on both top- and bottom-line.

For fiscal-year 2025, Darden anticipates approximately $12.1 billion in sales, an increase from the previous forecast of $11.8-11.9 billion. The company forecasts same-restaurant sales to rise by 1.5% (excluding Ruth’s Chris and Chuy’s as they were not owned and operated by Darden for a 16-month period at the beginning of the fiscal year). Earnings from continuing operations are expected to range between $9.40 and $9.60 per share.

Building on continued strength of its operations, Darden expects to increase its capex to $650 million in the ongoing fiscal year, supporting 50-55 new restaurant openings during the fiscal year.

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Shareholder-Focused Capital Allocation

Darden has been paying dividends since 1995, demonstrating a commitment to returning value to shareholders. With consistent annual payout increases since 2005, DRI was on track to achieve a “Dividend Aristocrat” status. However, the company chose financial prudence over maintaining the badge when the Covid-19 pandemic hit dining business.

Darden quickly returned to dividend growth even before the restrictions were lifted, raising payouts at a CAGR of 16.3% over the past three years, faster than most peers in the industry. Moreover, Darden’s current dividend yield of 3.01% is 3.5x the average for the Consumer Discretionary sector. With strong cash generation and stable revenues, as well as a moderate payout ratio, DRI’s dividend is expected to continue growing at a fast clip for years to come.

Darden’s stock delivered a ~15% gain in the past year, climbing to an all-time high in December 2024. However, the recent market turbulence shaved several percentage points off its gains, taking its valuation to a more affordable level.

Currently, DRI trades at a moderate premium to its sector, while sitting in the middle of the valuation scale for its peers in the industry. Leading Wall Street analysts forecast an average upside of 10% for the stock in the next 12 months, with the most recent ratings envisioning an upside of over 20%.

Darden’s stock performance is further supported by its strategic buyback program. The company actively repurchases shares to enhance EPS and support stock price growth. In the first half of FY 2025, DRI repurchased over $314 million worth of stock under a $1 billion buyback program authorized last year.

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Investing Takeaway

Darden Restaurants has diverse dining brands, strong revenue growth, and shareholder-focused strategies. Its disciplined acquisitions, efficient operations, and steady dividend increases highlight resilience and consistent returns. DRI is well-positioned for sustained growth and shareholder value creation supported by robust cash flows and a sound financial foundation. As such, Darden can be a valuable addition to income portfolios.

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Dividend Investor Portfolio

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Portfolio News

JPMorgan Chase & Co. (JPM) is scheduled to release its Q4 2024 earnings on January 15th.

BlackRock (BLK) is scheduled to release its Q4 2024 earnings on January 15th.

▣ The ex-dividend date for EOG Resources (EOG) is January 17th. The payout, expected to be disbursed on January 31st, will be ~7.5% higher than the previous one.

Edison International (EIX) saw its shares drop by over 16%, triggered by the Southern California wildfires burning at or near some of the service areas of its subsidiary Southern California Edison (SCE).

According to EIX and confirmed by Morgan Stanley, the Palisades Fire – so far the most damaging one – is not in SCE service area and does not involve Edison equipment. While the Eaton Fire originated in the SCR service area, the company de-energized its distribution lines in the area before the fire started as part of SCE’s Public Safety Power Shutoff (PSPS) program. The Hurst Fire, which started two days later than the Palisades and the Eaton fires, is also outside of SCE’s territory, but the company has transmission facilities near the reported ignition site.

According to Bank of America analysts, there is no indication that any of SCE’s equipment ignited the fire. Moreover, Jeffries said that the sell-off in EIX shares was excessive because California law limits the company’s financial responsibility for wildfire damages and provides a $21 billion fund to cover claims, meaning Edison’s actual exposure is likely far lower than the market fears. In addition, EIX may not be exposed at all if the wildfires were not caused by Edison’s operations and/or if the company can demonstrate it acted responsibly.

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Recent Trades

None at the moment, although we are constantly evaluating stocks for a possible addition to the portfolio. Stay tuned.

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Portfolio Attributes

Dividend Portfolio Yield
Expected Dividend Growth Expected Annual Income
3.80% +9.68% $5,388.17
Yield-on-Cost Adjusted, Weighted
 Average Analyst 12-Month Growth Outlook 10K Per Stock at the Time of Purchase

Current Portfolio

Name EX-Dividend Date Payment Date Yield on Cost  Annual DPS 
Automatic Data Processing (ADP) Mar 07, 2025 Apr 01, 2025 2.24% $5.60
Allianz SE ADR (ALIZY) May 09, 2025 May 28, 2025 5.67% $1.49
Amgen (AMGN) Feb 14, 2025 Mar 07, 2025 3.27% $9.52
BlackRock (BLK) Mar 07, 2025 Mar 22, 2025 2.56% $20.40
Edison International (EIX) Jan 07, 2025 Jan 31, 2025 4.82% $3.12
EOG Resources (EOG) Jan 17, 2025 Jan 31, 2025 3.95% $3.64
IBM (IBM) Feb 10, 2025 Mar 10, 2025 3.13% $6.68
JPMorgan Chase (JPM) Jan 06, 2025 Jan 31, 2025 2.86% $5.00
Kroger (KR) Feb 15, 2025 Mar 01, 2025 2.82% $1.28
LyondellBasell (LYB) Mar 10, 2025 Mar 17, 2025 5.27% $5.36
PepsiCo (PEP) Mar 07, 2025 Apr 07, 2025 3.64% $5.44
Philip Morris (PM) Mar 21, 2025 Apr 09, 2025 6.06% $5.40
Qualcomm (QCOM) Mar 03, 2025 Mar 24, 2025 2.25% $3.40
VICI Properties (VICI) Mar 21, 2025 Apr 04, 2025 5.19% $1.72

 

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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman


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Disclaimer

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