The stock has outrun the S&P 500 for years, and a big-time investor recently bought the stock. Yet, there are five additional reasons to buy the stock today.
If I were a betting person, I’d wager that pizza is probably the most common food on the average person’s list of favorite dishes. My evidence? Look at Domino’s Pizza (DPZ -0.23%), a stock that has turned quick, cheap pizza into fortunes for long-term investors. A modest $1,000 investment in 2004 would be worth over $54,000 today, returning over 50 times your money in 20 years.
Winning stocks often continue winning, but you shouldn’t buy a stock solely because it did great things in the past. That doesn’t guarantee anything about the future.
Instead, consider buying Domino’s Pizza stock like there is no tomorrow — today, for these five reasons.
1. Pizza’s continued appeal to the modern consumer
Pizza is on my list of favorite foods, but I think the reasons why resonate with many people. Pizza is arguably the perfect take-out meal. For starters, it’s far easier to order it take-out than to make it yourself. Even if you have cooking skills, you’re talking about several ingredients, a mess, and time spent preparing and cooking it. You can have a hot pizza from Domino’s in minutes.
Second, it’s remarkably customizable, which gives it broad appeal to the average person. As long as you like bread and cheese, you probably like pizza. You can switch out the cheese and toppings to make it almost anything you want it to be. Third, it’s become an economical way to feed the masses. Got a family of kids? Go to the fast-food burger joint and price out four or five meals versus a large Domino’s pizza. The bang for the buck is almost unbeatable.
2. The company’s brand and technology advantage in a fragmented market
Why has Domino’s done so well in a market with competition on almost every street corner? It boils down to speed, price, and quality. People may not think Domino’s tastes quite as good as their favorite mom-and-pop pizzeria’s food, but Domino’s has mastered giving customers a fast, cheap meal that tastes good enough to win your business.
The company has technology perks, including an app and website from which you can order and even track your order through the kitchen and to your doorstep. Domino’s has steadily increased its market share in the United States, from 13.5% in 2015 to 22.9% last year.
3. Room for store expansion
Domino’s could continue taking market share as it further penetrates the market. The company plans to expand its store count from:
- 6,930 in the U.S. to over 8,500.
- 14,032 in international markets to over 40,000.
In other words, the company’s proven business model could expand for many years, so growth doesn’t seem likely to be a concern anytime soon. Analysts forecast that the business will grow earnings at an annualized rate of 11% over the long term.
4. A growing dividend
Domino’s is a franchise business model, meaning that it sells its brand and intellectual property to store owners, called franchisees. Domino’s gets a franchise fee, plus a small royalty on each store’s sales. The benefit is that it transfers most of the costs of opening and operating stores to the franchisee, resulting in stable revenue streams for Domino’s. McDonald’s is similar.
Although Domino’s has not paid and raised its dividend as long as McDonald’s has, it’s becoming an impressive dividend stock. It only yields 1.4% at its current share price, but makes up for it with stellar growth. The company has grown its dividend for 12 consecutive years, with an average increase of 18% over the past five years. The dividend is only 36% of Domino’s 2024 earnings estimates, so you can count on the checks to keep coming (and increasing).
5. The stock is a solid deal right now
Well-known, market-beating stocks are rarely bargains. As Warren Buffett famously said, it’s better to buy great companies at fair prices than fair companies at low prices.
Domino’s Pizza trades at a forward price-to-earnings (P/E) ratio of just under 24. I like using the price/earnings-to-growth (PEG) ratio to compare a stock’s valuation to its anticipated growth. Based on analysts’ consensus 11% growth estimate, Domino’s PEG ratio is about 2.2 today. That’s not cheap, but I generally feel comfortable buying high-quality stocks at PEG ratios up to 2.0 to 2.5, so this isn’t ridiculous.
Ironically, Warren Buffett’s Berkshire Hathaway recently initiated a small position in Domino’s, despite broader selling to accumulate more cash. Nobody should buy or sell a stock based solely on what someone else does, but it’s a harmless coincidence that Buffett apparently likes the stock, too.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Domino’s Pizza. The Motley Fool has a disclosure policy.
