Food-service stocks are rarely “must have” names. Not only is it just not a high-growth business, it’s a highly competitive, low-margin one as well. These are characteristics that many investors aim to avoid.
Every now and then, though, a compelling restaurant stock presents itself. Domino’s Pizza(NYSE: DPZ) is one such name, and is likely to remain one for the foreseeable future. If there’s a spot in your portfolio for a steady grower, this often-overlooked ticker might be a great fit for three key reasons.
Whatever the restaurant chain is doing, it’s working. In 2021, it became the world’s single biggest pizza chain with 18,848 locales, eclipsing Pizza Hut’s then-lead. The company’s put some distance between itself and the reach of Yum Brands‘ rival arm in the meantime, too.
This growth hasn’t been expansion just for the sake of boasting a bigger footprint, either. Total revenue growth has improved at least as much as its store count has since the company went into growth overdrive in 2013. With the exception of the comparison to the swell of business during and because of the COVID-19 pandemic, same-store sales growth has remained positive for every quarter during this stretch as well.
Profits have also improved at an even better overall pace, overcoming the world’s recent bout with inflation. This is mostly due to good management of its growing scale.
This persistent progress is a testament to the fact that Domino’s is delivering (figuratively as well as literally) a product that people want and can afford. The same can’t necessarily be said of its competitors.
Domino’s Pizza stock is currently bargain-priced no matter how you measure it. One measurement, of course, is the pullback from highs reached earlier this year. Shares are currently down 17% from June’s peak. That’s not a huge setback although it is a sizable one for this particular ticker.
The stock’s weakness actually extends back to 2022,when the pandemic finally wound down and investors had their first chance to assess the pizza chain in a normal environment following a period of rapid expansion. They didn’t necessarily dislike what they saw. They just weren’t quite sure how to price it into the stock.
The analyst community isn’t dissuaded. The majority of these pros currently rate Domino’s stock a strong buy, while their consensus price target of $483.57 stands roughly 12% above the ticker’s present price. That’s not a huge difference, but it’s a relatively big one by restaurant stock standards.
The third reason to consider nibbling on Domino’s Pizza? Its dividend. The stock’s forward-looking yield stands at 1.4%. Oh, you can certainly find bigger yields — and you should if investment income is your immediate priority. This reliable dividend payment should simply be seen as an additional topping to the meatier reasons to own a stake in Domino’s. That’s consistent, above-average growth rooted in its well-run and well-marketed business.
That being said, this stock is certainly no slouch to income-minded investors looking for reliable long-term dividend growth. Domino’s Pizza has now upped its annualized quarterly payout for 11 consecutive years, from $0.20 per share in mid-2013 to $1.51 now. That’s a compound annual growth rate of around 20%, which is certainly better payment growth than more familiar dividend payers can offer.
There’s also no reason to suspect that this dividend growth is in jeopardy. Only about one-third of its net earnings are dished out in the form of dividends. That’s plenty of cushion.
There’s a fourth, less quantitative reason to consider buying a piece of Domino’s Pizza sooner rather than later. This stock is now one of only a few names compelling enough to satisfy the perpetually picky Warren Buffett in an environment where he’s finding little that he likes.
You don’t necessarily need to copy every single one of the legendary stock picker’s selections just because he’s Warren Buffett, to be clear. On the other hand, he’s not called the Oracle of Omaha for nothing. His company, Berkshire Hathaway, reliably outperforms the S&P 500, given 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 stake in the grand scheme of things — Berkshire’s 1.3 million shares are collectively only worth about half a billion dollars. That’s less than 1% of Berkshire Hathaway’s total stock holdings, and less than 4% of Domino’s Pizza itself. Buffett and his lieutenants clearly like the company well enough to take on a fairly small position, though. That’s something, particularly knowing that Berkshire’s small stakes 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 has positions in and recommends Berkshire Hathaway and Domino’s Pizza. The Motley Fool has a disclosure policy.
