Buying and holding a stock forever is exaggeration. I'm not suggesting that investors should hold stocks for a literal eternity. When I talk about buying and holding stocks forever, I mean for an entire investment career. In other words, there's a stage in life during which people invest. It can last for 20, 30, or 40 years, or more, depending on one's age and personal finance goals.
Are there any companies that can truly be bought and held for decades and which require minimal ongoing research to ensure everything with the business is still on track? Well, investors can't make infallible prophecies about everything. But they can reasonably project certain things decades in advance.
For example, I'll bet that grocery stores will still exist in 30 years. Therefore, buying and forever holding shares of the top players in the grocery space would be a reasonable idea.
I'll also bet that people will still be eating pizza decades from now. Yes, consumer tastes will change. But I can't imagine that the world would ditch pizza entirely.
If people are still eating pizza decades from now, then I'll also bet that they'll be buying pizza from whichever brand is the most accessible. As of this writing, the most accessible is Domino's Pizza (DPZ +1.85%). With nearly 21,000 locations worldwide, no other pizza chain is bigger.
NASDAQ: DPZ
Key Data Points
But is there any way to predict that Domino's will still be the biggest pizza company decades from now? Well, I believe there's one metric that investors need to look at when answering this question.
This is key to Domino's long-term success
Of Domino's nearly 21,000 locations, 99% are owned by franchisees -- independent business owners. Therefore, if Domino's is going to remain the biggest player, it needs franchisees to keep the stores they have open, and to open even more locations in the long term.
But business owners need profits. If Domino's franchisees aren't making much, good luck trying to get them to open more units. If they're making plenty of money, they'll demand opportunities to open more -- no need to worry.
Here's the good news for investors: 2023 was one of the best years ever for profitability for Domino's franchisees.
For earnings before interest, taxes, depreciation, and amortization (EBITDA), Domino's estimates that its franchisees made $162,000 on average per location in 2023. Not only is that a great profit, it was a whopping 17% increase from 2022.
Estimates vary. But multiple sources suggest it costs less than $600,000 for franchisees to open a new Domino's location. That puts the payback period at under four years. Many business owners would sign up for that. And it's why I believe that Domino's will remain the biggest pizza chain for the foreseeable future.
What this means for investors
Is Domino's Pizza a forever stock? Well, people will likely still be buying pizza far into the future, generally speaking. And Domino's franchisees are making lots of money, which means they'll be opening many more locations. Therefore, it's likely that people will still be buying pizza specifically from Domino's because it will be the most accessible brand.
But what about Domino's itself? Will its own business be doing well in this scenario?
Consider that Domino's generates most of its revenue by providing supply chain services -- which includes fresh pizza dough -- to its franchisees. But this is a low-margin business, and it shares half of these profits with franchisees anyway.
The real money-maker for Domino's is franchise fees and royalties, which is essentially pure profit. Therefore, if its franchisees are doing well, then it's likely that Domino's itself will be a highly profitable company as well, giving it the means to reward its shareholders.
Domino's Pizza is a forever stock. That doesn't mean that it will necessarily outperform the S&P 500 over the next 50 years. But its pizza will be in demand, its franchisees will be happy with their profits, and Domino's itself will still be generating healthy profits thanks to its franchise fees and royalties. The stock will likely trend higher as well because of the health of the business, and because management has historically returned profits to shareholders.
