A Bargain Restaurant Dividend: McDonald’s Corporation (MCD), Darden Restaurants, Inc. (DRI), Yum! Brands, Inc. (YUM)

Data from Morningstar

What growth is needed?

To answer this question I’ll use the dividend discount model to determine the necessary dividend growth rate. I’ll assume a 2-stage growth model – 10 years of growth at a rate to be determined followed by 3% growth in perpetuity. For a discount rate I’ll use 8%, which is roughly the long-term growth of the market as a whole. The result of this calculation is below.

Note that I’ve used the TTM dividend payment of $1.93 per share instead of the 2012 value since Darden’s fiscal year ends in May. As you can see, Darden needs to grow its dividend just shy of 5% annually for the stock to be fairly valued. Given the high payout ratio this effectively means that Darden Restaurants, Inc. (NYSE:DRI) must grow its earnings at roughly 5% per year. This doesn’t seem unreasonable, and the average analyst estimate for earnings growth is 6.6%. That level of growth would value shares of Darden 15% higher than the current market value.

The Bottom Line

The significant price drop in shares of Darden turned a solid dividend stock into a bargain, with a 4.33% yield and reasonable growth prospects. I would argue that Darden’s dividend is even more attractive than McDonald’s Corporation (NYSE:MCD), which is one of my favorite dividend stocks. In the short term Darden may face difficulties, with the payroll tax hike and sequestration bogging down consumers. But in the long run, Darden offers a fantastic dividend opportunity.

The article A Bargain Restaurant Dividend originally appeared on Fool.com and is written by Timothy Green.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.