Buffet backs Domino's: Considering a slice?
In a recent development, Berkshire Hathaway, the multinational conglomerate helmed by Warren Buffett, has taken a significant stake in the UK's Domino's Pizza Group (LSE: DOM). This move comes as Berkshire Hathaway reaches a market value of $1 trillion, underscoring its impressive performance in the US stock market.
The UK-listed Domino's Pizza Group, a master franchise of the US chain with the rights to open stores in the UK and Ireland, offers several potential benefits and risks for investors.
## Potential Benefits
One of the key advantages is the attractive dividend yield. With a yield of around 4.2%, Domino’s Pizza Group surpasses the average for the FTSE 250 (3.6%). This makes it an appealing choice for income-focused investors seeking steady returns.
The company's strong profitability is another significant factor. With a net profit margin of 13.6%, Domino’s Pizza Group demonstrates robust financial health.
Positive analyst sentiment also plays a role in the appeal of Domino’s Pizza Group. Some analysts, such as Shore Capital, have reiterated "buy" ratings, and consensus target prices suggest a potential upside of 46%, with an average target of 371.60 GBp compared to current prices near 254–258 GBp.
Despite a slight contraction in revenue growth recently, underlying profit before tax grew by 8.4% year-on-year, and the company generated healthy free cash flow.
## Potential Risks
However, investing in Domino’s Pizza Group is not without its risks. The stock is trading near 52-week lows, with the price down approximately 18% year-to-date, reflecting ongoing market concerns and challenging investor sentiment.
Revenue growth has been negative (-2.7% recently), which may signal underlying issues in market expansion or competitive pressures.
The company's valuation metrics present mixed signals. While it trades at a lower P/E ratio (11–13) compared to its US counterpart, this is partly because Domino’s Pizza Group is a franchisee rather than the global franchisor. Additionally, some sources report an unusually high forward P/E (over 1,000), indicating an atypical or unstable earnings profile.
Debt and liquidity concerns are another potential risk. The company’s quick and current ratios suggest relatively tight liquidity, although its debt-to-equity ratio is negative due to accounting treatment rather than excessive leverage.
As a consumer cyclical stock, Domino’s is sensitive to changes in consumer spending and broader economic conditions, which can impact performance and share price stability.
In conclusion, investing in Domino’s Pizza Group offers a compelling mix of strong profitability, attractive dividend yield, and positive analyst sentiment. However, investors should carefully consider the risks associated with recent share price weakness, negative revenue growth, and some concerns around liquidity and future earnings stability. The potential for significant upside if market sentiment improves must be weighed against ongoing operational and sector challenges.
Personal-finance investors seeking steady returns might find appeal in Domino’s Pizza Group, thanks to its attractive dividend yield surpassing the FTSE 250 average. However, potential risks for investors include the stock's trading near 52-week lows, negative revenue growth, and concerns around liquidity and future earnings stability.
