Foodservice stocks are rarely “must-have” names. Not only is it not a fast-growing company, it is also a highly competitive company with low margins. These are features that many investors want to avoid.
However, every now and then an attractive restaurant stock presents itself. Domino’s Pizza(NYSE:DPZ) is one such name, and will likely remain so for the foreseeable future. If there’s a place in your portfolio for a stable grower, this often-overlooked ticker could be a good fit for you for three main reasons.
Whatever the restaurant chain is doing, it’s working. In 2021, it became the largest pizza chain in the world with 18,848 locations, eclipsing Pizza Hut’s lead at the time. The company has created some distance between itself and the reach of Yum Brands‘ rival arm in the meantime too.
This growth has also not simply been an expansion to boast a larger footprint. Total sales growth has improved at least as much as the number of stores since the company accelerated its growth in 2013. With the exception of the comparison to strong sales during and due to the COVID-19 pandemic, same-store sales growth has remained positive every quarter during this stretch.
Earnings have also improved overall at an even better pace, overcoming the recent battle with global inflation. This is mainly due to good management of the growing scale.
DPZ Earnings (Quarterly) data by YCharts.
This continued progress is a testament to the fact that Domino’s (both figuratively and literally) delivers a product that people want and can afford. The same cannot necessarily be said of its competitors.
Domino’s Pizza stock is dirt cheap right now, no matter how you measure it. One measure, of course, is the pullback from the highs reached earlier this year. Shares are currently down 17% from their June peak. That’s not a huge setback, but it is a significant one for this particular ticker.
The stock’s weakness actually dates back to 2022, when the pandemic finally ended and investors got their first chance to assess the pizza chain in a normal environment after a period of rapid expansion. They didn’t necessarily hate what they saw. They just didn’t know exactly how to price it into the stock.
The analyst community is not discouraged. The majority of these professionals currently rate Domino’s stock as a Strong Buy, while their consensus price target of $483.57 is roughly 12% above the current ticker price. That’s not a huge difference, but by restaurant inventory standards it’s relatively large.
The third reason to consider nibbling on Domino’s Pizza? Its dividend. The stock’s forward-looking yield is 1.4%. Oh, you can certainly find bigger returns – and you should if investment income is your immediate priority. This reliable dividend payout should simply be seen as a complement to the more compelling reasons for owning a stake in Domino’s. That’s consistent, above-average growth rooted in well-managed and well-marketed operations.
That said, this stock is certainly no slouch for income-oriented investors looking for reliable dividend growth over the long term. Domino’s Pizza has now increased its annualized quarterly payout for eleven consecutive years, from $0.20 per share in mid-2013 to $1.51 today. That’s a compound annual growth rate of about 20%, which is certainly better payment growth than more well-known dividend payers can offer.
There is also no reason to suspect that this dividend growth is in danger. Only about a third of net profits are paid out in the form of dividends. That’s enough cushion.
There’s a fourth, less quantitative reason to buy a slice of Domino’s Pizza sooner rather than later. This stock is now one of the few names compelling enough to satisfy the perpetually picky Warren Buffett in an environment where he finds little to like.
To be clear, you don’t necessarily have to copy all of the legendary stock picker’s selections just because he’s Warren Buffett. On the other hand, he is not called the Oracle of Omaha for nothing. His company, Berkshire Hathawayreliably outperforms the S&P500if there is enough time. That’s why Berkshire’s recent purchase of a stake in Domino’s is such a strong vote of confidence in the company.
It’s a relatively small share in the grand scheme of things: Berkshire’s 1.3 million shares are collectively worth only about half a billion dollars. That’s less than 1% of Berkshire Hathaway’s total stock ownership, and less than 4% of Domino’s Pizza itself. However, Buffett and his lieutenants clearly like the company enough to take a fairly small position. That’s something, especially knowing that Berkshire’s small bets often become larger positions as the Oracle of Omaha adds to them over time.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Berkshire Hathaway and Domino’s Pizza. The Motley Fool has a disclosure policy.
3 Reasons to Buy Domino’s Pizza Stock Like There’s No Tomorrow was originally published by The Motley Fool
