The name of the game as a dividend growth investor is to pick quality businesses with strong brands. This often leads to growing profits over time, which can also support healthy dividend growth.
The largest pizza franchise in the world, Domino's Pizza (DPZ 1.36%), is arguably a business that fits this profile. It just rewarded shareholders with a 10% raise in its quarterly dividend per share to $1.21 last month. Here are three reasons it could be worth a look for dividend growth investors.
1. Everybody loves pizza, and Domino's is the industry leader
Domino's is the world's most dominant pizza chain -- it isn't even close. The company's nearly 20,000 stores in more than 90 markets serve over a million customers each day. The next biggest competitor, Papa John's (PZZA 0.23%), only has 5,000 locations in 45 countries. This explains how Domino's $11.1 billion market capitalization nearly quadruples Papa John's $2.9 billion market cap.
Domino's total revenue edged 3.6% higher year over year to $1.4 billion in the fourth quarter (ended Jan. 1). What was behind these results?
Domino's global retail sales were down 1.1% during the fourth quarter. But factoring out the unfavorable foreign currency translations that resulted from its significant international operations, global retail sales grew 5.2% in the quarter.
These results prove that with inflation remaining high, cost-conscious customers were still appetized by both their love of pizza and the value proposition of the company's products. Along with a 5.5% growth rate in the store count to almost 19,900 over the year-ago period, this explains Domino's decent top-line growth rate for the quarter.
Domino's non-GAAP (adjusted) diluted earnings per share (EPS) increased by 4.2% year over year to $4.43 during the fourth quarter. A higher growth rate (5.2%) in the company's cost of sales compared to revenue brought pressure on its profitability, leading the net margin to decrease by 20 basis points to 11.4% in the quarter. However, a 2.6% reduction in Domino's weighted average diluted share count more than offset this dip in profitability. This enabled the company's adjusted diluted EPS to grow faster than its revenue for the quarter.
Domino's plans to open more stores worldwide and keep repurchasing shares at opportune times should continue to be a recipe for success. Analysts believe the company's adjusted diluted EPS will compound at 10.1% annually through the next five years.
Image source: Getty Images.
2. Dishing out double-digit dividend growth
Domino's 1.6% dividend yield isn't quite as high as the S&P 500's 1.7%. But if you're an investor seeking tremendous dividend growth and capital appreciation, don't make the mistake of writing off this wonderful business for your portfolio because of its lacking starting yield.
Just as Domino's quarterly dividend per share has more than quintupled over the last decade, so has the stock's share price. This has kept the dividend yield relatively low during that time.
DPZ Dividend data by YCharts.
And impressive payout growth should persist thanks to a dividend payout ratio expected to come in at merely 37% in 2023. That's because such a low payout ratio gives Domino's the capital to attract franchisees to open more stores, reduce debt, and complete share buybacks.
3. The valuation is decent
The uncertain economic environment hasn't been kind to Domino's stock. Shares plunged 21% in the last 12 months, reducing Domino's forward price-to-earnings (P/E) ratio to 21.1, slightly below the restaurant industry average forward P/E ratio of 22.9. Arguably, this has created a potential buying opportunity for dividend growth investors to pick up shares in the beaten-down, industry-leading restaurant stock.
