Domino’s Pizza (DPZ) offers investors one of the best business models, and the company garners one of the ‘Highest Rated’ economic castles in our coverage universe. That means that for each dollar of capital it invests the company generates gobs and gobs more, so much that it is more than almost any other company that we follow. The franchiser really sets the standard with respect to what we define as a pure “Economic Castle.”
Not only did the pizza giant raise its dividend nearly 23% February 25, but the company beat expectations on both the top and bottom-line in its reported fourth-quarter results. It’s hard to believe, but domestic same-store sales grew more than 10% in the quarter versus the year-ago period and 12% for the full-year. This is incredible – Domino’s is not a new concept, but Americans seemingly can’t get enough of good pizza, and the franchiser’s efforts to “get things right” have resonated in a gigantic way. Its international division also performed well, with same-store sales growth of 8.6% in the quarter and 7.8% for the full year. By comparison, Yum! Brands’ (YUM) Pizza Hut Division Sales and Papa John’s (PZZA) system-wide North America and International segments recorded same-store sales increases of 1%, 1.9%, and 5.3% during the period. Domino’s is taking share.
Unlike those of McDonald’s (MCD) where there seems to be a lot of unrest, at least prior to the company’s most recent same-store sales performance, the store economics of Domino’s around the world are fantastic, and management pointed to a “positive cycle” as “the momentum continued through 2015.” It’s hard to find much not to like in the company’s fourth quarter that saw revenue advance more than 15%, which Domino’s leveraged into an impressive 30%+ increase in net income in the period. Fiscal 2015 brought in nearly $230 million in free cash flow, and while the company’s recapitalization plan has leveraged up the balance sheet ($2.24 billion in total debt), we have no concerns about its credit strength given its free cash flow generating capacity.
Domino’s may not be one for income investors looking for a large quarterly payment right now, but we’d love to include this one in either the Best Ideas Newsletter portfolio or Dividend Growth Newsletter portfolio at the right price. Shares surged on the trading session February 25.