Domino’s Pizza, Inc. (NYSE:DPZ) Is An Attractive Dividend Stock – Here’s Why

Dividend paying stocks like Domino’s Pizza, Inc. (NYSE:DPZ) tend to be popular with investors, and for good reason – some research shows that a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.

Investors might not know much about Domino’s Pizza’s dividend prospects, even though it has been paying dividends for the last six years and offers a 1.0% yield. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. It also bought back stock during the year, equivalent to approximately 5.4% of the company’s market capitalisation at the time. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Click the interactive chart for our full dividend analysis
NYSE:DPZ Historical Dividend Yield, April 22nd 2019
NYSE:DPZ Historical Dividend Yield, April 22nd 2019

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. So we need to be form a view on if a company’s dividend is sustainable, relative to its net profit after tax. In the last year, Domino’s Pizza paid out 25% of its profit as dividends. This is medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Domino’s Pizza paid out a conservative 34% of its free cash flow as dividends last year.

Is Domino’s Pizza’s Balance Sheet Risky?

As Domino’s Pizza has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks.

A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA is a measure of a company’s total debt. Net interest cover measures the ability to meet interest payments on debt. Essentially we check that a) a company does not have too much debt, and b) that it can afford to pay the interest. With net debt of more than 5x EBITDA, Domino’s Pizza could be described as a highly leveraged company. While some companies can handle this level of leverage, we’d be concerned about the dividend sustainability if there was any risk of an earnings downturn.

We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. Interest cover of less than 5x its interest expense is starting to become a concern for Domino’s Pizza, and be aware that lenders may place additional restrictions on the company as well. Low interest cover and high debt can create problems right when the investor least needs them. We’re generally reluctant to rely on the dividend of companies with these traits.

Remember, you can always get a snapshot of Domino’s Pizza’s latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Domino’s Pizza has been paying a dividend for the past six years. The dividend has been quite stable over the past six years, which is great to see – although we usually like to see the dividend maintained for a decade before giving it full marks, though. During the past six-year period, the first annual payment was US$0.80 in 2013, compared to US$2.60 last year. Dividends per share have grown at approximately 22% per year over this time.

Domino’s Pizza has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

Dividend Growth Potential

The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient’s purchasing power. It’s good to see Domino’s Pizza has been growing its earnings per share at 27% a year over the past 5 years. Earnings per share have rocketed in recent times, and we like that the company is retaining more than half of its earnings to reinvest. However, always remember that very few companies can grow at double digit rates forever.

Conclusion

Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. It’s great to see that Domino’s Pizza is paying out a low percentage of its earnings and cash flow. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we’d like. Overall we think Domino’s Pizza is an interesting dividend stock, although it could be better.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 18 Domino’s Pizza analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.