Domino's Pizza Delivers an Attractive Entry for Income Investors

Key Points

• Domino's Pizza is pulling back following a tepid earnings report, but don't expect a major decline. 
• The company is a buy-and-hold stock for dividend growth investors.
• Analysts and institutions favor the stock, and the price target and rating have moved higher since Q2.

Domino’s Pizza NYSE: DPZ is no high-yielding stock, but it’s not the yield that matters so much as the trajectory of distribution growth. This company pays a tiny fraction of its earnings in dividends, about 35%, and has solid cash flow and an outlook for sustained distribution growth. Domino’s has already increased the payment for 11 years, putting it on par with Dividend Achievers and future Dividend Aristocrats.

That outlook is compounded by the international growth story and the 18% distribution CAGR, which implies investors can expect inflation-beating distribution increases over the next few years. 

Domino’s Pulls Back On Mixed Results 

Due to some tepid figures, Domino’s Pizza stock is pulling back following the Q3 release. While total revenue is down YOY and slightly below expectations, internal details and exit from Russia offset the weakness. Net revenue fell primarily due to lower realized market basket item pricing and a slight downtick in US volumes. 

US comps fell by 0.6% but were offset by International Growth and FX tailwinds to drive retail sales up by 4.9%. Ex-Russia, the company grew retail sales by 5.1% and international growth is expected to continue. International and emerging markets should continue to underpin results in 2024 due to an expectation for world-leading GDP growth. 

The margin news is also favorable to dividend growth investors. A 1-off resulted in $0.59 of positive impact on the bottom line, but this is not enough to offset the company’s earnings strength. The company’s $4.18 in reported earnings is up 50% YOY and would beat the consensus estimate by more than $0.25 even with the $0.59 adjusted. GAAP EPS is $0.89 better than the Marketbeat.com consensus, and earnings strength is expected to continue. 

The guidance is weak but favorable to the long-term outlook and distribution growth. Store count growth is expected to run slightly below the low end of the target range, with revenue running below the mid-point of the range and margin expected to hold up.

Analysts and Institutions Order Up Some Domino’s Pizza

The institutions and analysts favor Domino’s Pizza, and the capital return program is why. Not only does the company pay a solid dividend with a healthy trajectory for growth, but it buys back shares. Repurchases totaled $90 million in Q3, and shares were retired. The company has another $200 million left under the current authorization, roughly 1.6% of the market cap.

The 25 analysts tracked by Marketbeat peg the stock at Moderate Buy, which is up compared to last quarter and last year’s Hold rating. The price target is down compared to last year but trending higher among restaurant stocks compared to last month and last quarter and may continue to do so now that results are in. The takeaway from the price target is that it is about 12% above the pre-release action and suggests a double-digit upside on top of dividends and share repurchases. 

The Technical Outlook: Domino’s Pulls Back to Critical Support

The price action in Domino’s is down significantly from the COVID-inspired highs, but the bottom is in. The post-release action has the market down about 2.5% but still well above critical support. Critical support is near $320 and has been confirmed 5 times since 2020. The latest action has support moving higher; assuming this trend continues, the market should re-confirm support soon. If not, this stock may fall to the $320 level, where it would present a better value and yield.