It can pay to follow Warren Buffett. The legendary investor and his team of lieutenant managers have created monster investment returns at Berkshire Hathaway, so it is best to pay attention when they make a new investment.
One of Berkshire's latest investments is Domino's Pizza (DPZ +0.83%). The pizza chain is slowly expanding around the world as it enhances its lead over the fast food pizza competition.
Last quarter, Berkshire Hathaway greatly increased its position in Domino's stock and now owns 6.9% of the company. Should you follow Buffett's lead and buy Domino's Pizza stock for your portfolio?
Let's take a closer look and find out.
Slowing sales growth
Domino's reported its Q4 earnings in February. Global retail sales grew 4.4% in the period, which was a slowdown from the third quarter. Comparable store sales growth in the United States -- which measures revenue growth from existing restaurants -- slowed considerably to positive 0.4% in the the quarter. This caused investors to sell off Domino's stock, putting shares down 20% from recent highs as of this writing.
Slowing comparable sales growth is a concern to keep watch, but it looks better with proper context. Restaurant spending is going through a rough patch in the United States, which is leading most fast food companies to enter a slowdown. Domino's is performing better than most competitors in this environment.
For example, McDonald's same-store sales growth decreased 1.4% in the United States last quarter.
Internationally, Domino's Pizza is seeing a lot of success, posting 2.7% growth in Q4. With a menu that can feed a family without breaking the bank, Domino's should do well through any potential economic downturn, as diners who were previously eating at more expensive restaurants trade down to cheaper options such as the pizza chain.
Investors should note that there is a long runway for Domino's to grow its store count over the long term. At the end of 2024, the company had just over 21,000 restaurants worldwide. McDonald's has more than 40,000. With the ubiquitous love of pizza globally, I believe that Domino's can eventually reach the same store count as McDonald's.
This, along with strong international comparable sales growth, can drive overall sales growth for Domino's in the years to come. In the last 10 years, Domino's revenue has grown by a cumulative 130%. I wouldn't be surprised if it replicated this figure over the next 10 years.
NASDAQ: DPZ
Key Data Points
Robust dividend and share repurchase program
Another great characteristic of Domino's -- and likely why Buffett is attracted to the company -- is management's consistent return of capital to shareholders. Domino's pays both a dividend and repurchases its stock, a powerful combination that can help supercharge stock returns over the long haul.
In the last 10 years, Domino's shares outstanding declined by 38%. This reduction in shares outstanding helps boost revenue per share, earnings per share (EPS), and the company's dividend per share payout capacity. Over this same time period, Domino's dividend per share grew 470%. It currently yields just 1.64%, but Domino's has all the tools to be a strong dividend grower over the next 10 years. Management just approved a 15% increase to the dividend in its last earnings release.
DPZ PE Ratio data by YCharts
Is Domino's stock ridiculously cheap?
With Domino's stock in a 20% drawdown over the last year and down 25% from all-time highs, now is a good time to look at its valuation.
As of this writing, the company trades at a market cap of $14.7 billion. It has a price-to-earnings (P/E) ratio of 25, which may not look overly cheap but is well below the company's 10-year average of 33, which the stock usually gets due to its durable growth prospects and strong historical performance. At a cheaper P/E, Domino's dividend looks much more attractive and its share buyback program will be that more effective going forward.
Through traffic growth and new store openings around the world, I think Domino's can double or more its global retail sales in the next 10 years. Add in some profit margin expansion and further reduction in share count, and EPS will grow even faster. This will slowly bring down the stock's P/E ratio, which should lead to its share price rising over the long term.
Despite the recent struggle for fast food restaurants, Domino's Pizza stock looks like a great Warren Buffett bet to buy today.
