Entrepreneur magazine ranked Dunkin' Brands (NASDAQ:DNKN) among the top franchises for 2014 for a reason. Nearly 100% of the doughnut and coffee chain's stores are operated by franchisees today. This asset-light model enables Dunkin' Brands to quickly expand its business into new regions and key markets -- a strategy that has worked well for the company. In fiscal 2013, Dunkin' Donuts franchisees generated the highest EBITDA, or earnings before interest, taxes, depreciation, and amortization, per store in Dunkin Donuts history..
Franchises such as Dunkin' Brands are big business in the United States: Franchise establishments are on pace to create $493 billion in output this year, according to research from IHS. For perspective, that's about 3.5% of gross domestic product in the U.S. Whether you are a potential franchisee or a stock investor looking to unlock serious growth, let's look at how Dunkin' Brands stacks up as a top franchise company today.
Safety in numbers
Dunkin' Brands is growing its franchise business at a breakneck pace these days. The company opened 371 net new Dunkin' Donuts locations in 2013, making it the fifth-fastest-growing franchise this year as ranked by Entrepreneur magazine. The quick-service restaurant now boasts more than 18,000 points of distribution in nearly 60 countries. By operating under this franchise model, Dunkin' Brands can quickly expand and focus its resources on menu innovation and brand development.
Dunkin' Brands shareholders also benefit from the franchise system. That's because it helps increase profitability by offering a steady stream of revenue in the form of rent and royalty fees collected from franchisees. Dunkin' Brands also pulls in revenue from sales of ice cream products to its Baskin-Robbins International franchisees. At the end of last year, the company counted 2,467 Baskin-Robbins franchise locations in the U.S. Franchise sales from these Baskin-Robbins stores accounted for 5.5% of Dunkin' Brands total global franchisee-generated sales that year. . [TW: I rewrote this and broke it into two separate sentences to clarify.
Taking a small portion of sales from thousands of franchisee partners quickly adds up. Last year, the company's Dunkin' Donuts franchise system generated sales of $6.7 billion in the U.S. That's a lot of doughnuts. In addition to royalty payments, Dunkin franchise owners must contribute to other costs, such as store remodeling and marketing. In fact, Dunkin' Brands' franchisees invested in nearly 530 remodels in the last 12 months alone.
With franchisees sharing the burden of overhead costs, the company has cash left over to reward shareholders in the form of dividends and share buybacks. Dunkin' Brands now pays an annual dividend of $0.92 per share, and boasts a dividend yield north of 2%. The company paid $81 million in dividends to shareholders in fiscal 2013, and repurchased 28 million shares of its own stock.
For these reasons, it probably makes more sense to invest in Dunkin' Brands stock than to own one of its franchises. Not only does the stock pay a dividend, but it also has the potential to appreciate in value without many of the risks associated with operating a franchise.
Dunkin' Brands stock is down 6% year to date, and trading 15% below its 52-week high at about $44 a share today. This creates an opportunity for investors to buy the stock while it is trading off its recent high. Not to mention, you don't need a net worth of at least $250,000 to own the stock, which is one of the requirements to becoming a franchise owner with Dunkin' Brands.
Tamara Rutter has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.