It’s not surprising that pizza delivery soared during the prolonged lockdown in America. But as it turns out, not all pizza chains fared the same. Domino’s Pizza (NYSE:DPZ) was one of the superstar performers. And DPZ stock looks like a sure bet to reach a new record high and go even higher.
Domino’s was perhaps uniquely qualified to handle the pandemic. The company has always had a business model that was exclusively carryout or delivery. But something that the company did prior to the pandemic served it very well.
As it turns out, the company was already piloting a contactless delivery program in the first two months of the year. This assisted the company in two ways. Most obviously, the company did not have to create a new initiative from scratch. But second, customers had already started adopting the service. That’s a win-win.
Domino’s Was a Pandemic Winner
Not surprisingly, Domino’s delivered a blockbuster earnings report in July. The company posted $920 million in revenue. That was a 13.4% year-over-year (YOY) increase. And same-store domestic growth also showed strength with the United States market reporting 16.1% growth. However, what really had analysts and investors excited was the bottom line. The company reported $2.99 GAAP EPS which was 74 cents above the consensus estimate.
But DPZ stock hasn’t moved much since then. Initially, it moved down when the company reported it was replacing its chief financial officer. Also, like many companies, Domino’s did not provide forward guidance. And that was right about the time when investors got tired of getting no future outlook.
However, in the last three weeks, DPZ stock has been on a tear. After falling to $376.32 the stock has climbed over 15% and has broken through a level of resistance.
But a strong earnings report will only take Domino’s stock so far. Here are three things investors will be looking for.
Will Domino’s Continue to Grow Same-Store Sales?
Domino’s is now in its tenth consecutive year of positive same-store sales growth. In that time, the company has reported an average yearly growth of 6.4%. Internationally, the story is even more impressive. Domino’s has posted 106 consecutive quarters of positive same-store sales growth. And the average yearly growth was 5.5%.
What makes these numbers more impressive is the fact that Domino’s has continued to build out its global footprint. And the company is also gaining market share.
Will the Cash Continue to Flow?
Domino’s has also been a free cash flow (FCF) generating machine. This year, the company is expecting to generate $500 million of FCF. And that number is likely to go higher in the coming years. But it’s one thing to generate free cash flow, analysts want to know what companies are doing with it.
In the case of Domino’s they have made investments in their digital footprint as well as innovating their menu. Remember, it wasn’t so long ago that Domino’s was losing consumer preference because of taste. By using the cash in this way, Domino’s is able to keep its balance sheet clean and does not have to dilute shareholder value.
However, it has come at the expense of growing its dividend. Which brings me to my third item to watch.
Is the Dividend Ready to Explode?
Currently, Domino’s dividend does not look that exciting. But as we mentioned above, the company has been putting its cash to effective use. Further, the current 0.74% yield has been growing. And the company has been increasing its dividend significantly every year.
By any measure, Domino’s payout ratio is low so not only does the dividend look sustainable, it’s set up for future growth.
DPZ Stock Should Finish the Year Strong
Because Domino’s has been delivering impressive capital growth, investors may not be too concerned about strong dividend growth. However, with the consumer outlook remaining unclear for 2021, it’s likely that the company’s growth will reach more average levels. But even with more average growth, DPZ stock should continue to set new records in the last quarter of 2021.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.