It's been a tough environment for all kinds of stocks -- from tech to fast food. Consider that the S&P 500 index has plunged 22% in 2022, while shares of Domino's Pizza (DPZ 2.83%) have lost even more -- down 42%. In the mindset of a trader, this is a disaster and a reason to head for the exits of the pizza franchise.
Yet, if you view the sell-off through a dividend growth and value lens, you can see this as a buying opportunity rather than one for panicking. Let's take a look at Domino's fundamentals, dividend growth potential, and valuation.
Faring well against a tough backdrop
Since opening its first store in 1960 in Ypsilanti, Michigan, Domino's has transformed into the most dominant pizza chain in the world. Each day, the company now serves more than 1 million customers in over 90 countries across the globe. If you're considering buying shares of the company, it's important to understand the secret sauce behind its success.
Domino's formulated a winning blueprint for franchising, which centers around a collaborative relationship between its corporate team and franchisees. The company supplies quality ingredients, and uses standard store layouts and operational evaluations; this strategy has helped thousands of franchisees to replicate the prosperity seen typically at its stores.
During its third quarter, which ended Sept. 11, Domino's reported $1.1 billion in revenue, up 7.1% over the year-ago period. Excluding foreign currency effects, global retail sales increased 4.7% year over year for the quarter.
The company's focus on technology and ordering platforms has made it more convenient than ever for customers to order pizza online and either pick it up or have it delivered. The number of stores now totals 19,519, a 6.2% increase over the year-ago period.
Domino's produced $2.79 in non-GAAP (adjusted) diluted earnings per share (EPS) during the third quarter, which was a 13.9% year-over-year decline. Elevated inflation put pressure on the company's profitability, which is how non-GAAP net margin fell nearly 270 basis points over the year-ago period to 9.4% for the quarter. Domino's share buybacks, which resulted in a 2.9% decline in the weighted average diluted share count, weren't enough to offset the downturn in profitability.
But as inflation recedes and the company continues to open stores in international markets, profits are expected to rebound. In fact, analysts anticipate that Domino's adjusted diluted EPS will increase by 8.8% annually through the next five years.
Image source: Getty Images.
Like pizza dough, Domino's dividend can rise
Domino's 1.4% dividend yield won't impress income investors, but it is competitive with the S&P 500's 1.7% yield. And just as dough in a pizza oven rises, I believe Domino's dividend will too. That's because the stock's dividend payout ratio stands at 36% for 2022.
Since Domino's business is predominantly oriented toward franchising, the capital requirements are light. This low payout ratio provides breathing room for the company to repay debt, repurchase shares, and expand the payout ratio over time. That's why I believe Domino's will deliver double-digit annual dividend growth over at least the medium term.
A fair valuation for a blue chip
Domino's is clearly a wonderful business. Further adding to the buy case, the stock's valuation is a deal as well. Domino's forward price-to-earnings ratio of 22.4 is just below the restaurant industry's average of 23.9. And management is retiring shares near the stock's 52-week low, which conveys confidence in the company's future beyond just the near term. That makes Domino's an worthwhile pick for dividend growth investors.
