Investing in businesses with well-known brands and products that are in high demand tends to work out well over the long run. This is because such companies often have at least some level of pricing power, which leads to revenue growth, earnings growth, share price growth, and last but not least dividend growth.
As the leading pizza franchise on the planet, Domino's Pizza (DPZ 1.36%) is an illustrious restaurant company selling popular products to its customers. But does that make the stock a buy? Let's chew on Domino's business fundamentals and valuation to see if the company could be delectable to dividend growth investors.
Sales and profits are moving higher
Catering to one million-plus customers each day in dozens of countries at over 20,000 stores as of March 26, Domino's earns the distinction of being the undisputed leader of the pizza restaurant industry. For context, the company is about four-fold bigger in total restaurant count than the 5,000 locations of its most formidable competitor, Papa John's (NASDAQ: PZZA).
Domino's total revenue inched up by 1.3% over the year-ago period to just over $1 billion for the fiscal first quarter ended March 26. What factors helped the company to grow its top line in the quarter?
| Q1 2023 Currency Neutral Global Retail Sales Growth Rate | Q1 2022 Currency Neutral Global Retail Sales Growth Rate |
|---|---|
| 5.9% | 3.6% |
Data source: Domino's Q1 2023 earnings press release.
Domino's logged global retail sales growth of 2.2% during the fiscal first quarter. International store retail sales declined at a year-over-year rate of 0.5% for the quarter. But when adjusting for the fact that the company faced significant foreign currency translation headwinds due to a strong U.S. dollar, international store retail sales grew by 6.5% in the quarter. U.S. retail sales grew by 5.1% during the quarter. Steady demand for Domino's products and price increases explain how the company's global retail sales growth accelerated compared to the year-ago period.
| Q1 2023 Net Margin | Q1 2022 Net Margin |
|---|---|
| 10.2% | 9% |
Data source: Domino's Q1 2023 earnings press release.
The company's diluted earnings per share (EPS) soared 17.2% year over year to $2.93 for the fiscal first quarter. Thanks to its savvy cost management, Domino's total cost of sales and general and administrative expenses fell, driving net margin expansion by 120 basis points versus the year-ago quarter. Coupled with a reduction in Domino's diluted share count, diluted EPS galloped faster than revenue growth.
Domino's is still opening hundreds of stores each quarter. And based on the company's results, it isn't just opening stores for the sake of opening them, either: Franchisees clearly see the value of the Domino's name. This is why analysts project that Domino's diluted EPS will increase by 10.8% annually over the next five years.
Image source: Getty Images.
Future payout growth should be robust
At a surface level, Domino's 1.6% dividend yield doesn't look that special against the S&P 500 index's 1.7% yield. But when considering that Domino's as an investment has trounced the broader market in terms of dividend growth and share price growth, investors should hold this stock in high regard.
And with the company's dividend payout ratio forecasted to clock in at around 36% for the current fiscal year, superb dividend growth should persist moving forward. A low payout ratio leaves the company with the funds needed to invest in growth opportunities, execute share repurchases, and repay debt.
A quality business at an underrated valuation
Shares of Domino's have edged about 7% lower in the past year. Coupled with growing profits, this has pushed the stock's forward price-to-earnings (P/E) ratio down to just 20.8. Put into perspective, that is well below the restaurants industry average forward P/E ratio of 25.4. This is why I am optimistic that Domino's stock can outperform the market in the years ahead, which could make it a buy for investors seeking dividend growth and exceptional stock performance.
