If you invested $10,000 in pizza restaurant company Domino's Pizza (DPZ 0.87%) at the start of 2009, your investment would be worth over $825,000 today. It's one of the best-performing stocks over this 14-year period.
But if you invested $10,000 in Domino's Pizza stock three years ago, you'd have slightly less than that now. Investors are understandably frustrated with this performance. But I believe returns over the next three years should be better than the last three. Here's why.
Why Domino's stock is stuck in neutral
When you think about factors that contribute to a stock going up, Domino's had a lot going for it over the past three years. The company's revenue and profits are up, its dividend is higher, and there are fewer shares of Domino's now compared to three years ago, making remaining shares more valuable.
DPZ Revenue (TTM) data by YCharts
However, as the above chart shows, revenue and earnings per share (EPS) are up for Domino's over the last three years, but only moderately so. Indeed, growth has slowed to a crawl for the company. In the first quarter of 2023, its revenue was only up 1.3% year over year.
Domino's Q1 growth rate is far below its 10-year average. And with slower growth, the market is less willing to pay up for Domino's stock, leading to some of its cheapest prices in a decade from a valuation perspective.
DPZ Revenue (Quarterly YoY Growth) data by YCharts
Domino's stock has rebounded from its lows and is up 12% so far in 2023, so it's not quite as cheap as it was. But I believe the point remains: Returns for Domino's stock have been flat over the last three years because growth simply hasn't been good enough. Growth needs to get better if returns over the next three years are going to be better.
How Domino's stock can kick it back in gear
Domino's was a beneficiary of lockdowns during the COVID-19 pandemic because its delivery business is strong. Net sales for the company were up 10.4% and 11.7% during 2020 and 2021 respectively before dropping to just 3.9% growth in 2022. While that's a steep drop, I think the equally true takeaway is that Domino's retained all of its pandemic-boosted gains.
Against the backdrop of the pandemic boost, it's only reasonable that sales growth is taking a breather for Domino's right now. But management has a plan to kick things back in gear, starting with its partnership with Uber Technologies.
Although consumers can already place a delivery order through the Domino's app, management believes there's a large group of consumers that doesn't buy its pizza today but would if they could order through the Uber Eats app or the app for Uber's other brand, Postmates. That's why Domino's is teaming up with Uber. And it's why management told The Wall Street Journal it could add $1 billion in incremental pizza sales.
For perspective, Domino's had $17.5 billion in global retail sales in 2022. Assuming management is correct and its deal with Uber is accretive to sales, this is potentially about a 5% boost.
Over the next three years, Domino's expects to open a lot more restaurant locations to add to its portfolio of over 20,000 today. The company opened 947 over the past 12 months. At this pace, it's not unreasonable to think the company could increase its footprint by 10% or more over the next three years.
Historically, Domino's has also grown same-store sales more often than not. Therefore, taking its Uber partnership, new locations, and potential same-store-sales growth into consideration, the company may be able to grow its top line by 15% or more over the coming three years.
From there, Domino's can grow its EPS as a faster rate. Consider that while its revenue was only up 1.3% in Q1, its EPS grew 17% year over year. This is partly due to the company's share repurchase plan -- it repurchased over 100,000 in Q1 alone. This share reduction is set to continue, meaning EPS should grow faster than revenue in coming years.
Domino's will also likely keep paying and growing its dividend, adding to total shareholder returns.
Adding it all up, I believe Domino's stock could return north of 30% over the next three years when including dividend reinvestments, assuming its valuation is unchanged. That would be better than the flat returns over the past three years.
That said, Domino's may have a hard time beating the returns of the S&P 500 in that scenario. The market usually goes up about 10% annually on average, which equates to a 33% compound return.
Therefore, if you're looking for a consistent performer and a chance at outsize dividend growth, Domino's stock may be a good option. But if you're looking for a high chance of market-beating returns, you may want to look for other options.
