Image source: Domino’s Pizza Group plc
As an investor, it can be pleasing to see a share we own and is below water gradually move back to its breakeven point, hopefully before continuing higher. With a dividend stock, we have the added bonus of collecting dividends along the way.
That has happened this year with one of the UK dividend stocks in my portfolio: Domino’s Pizza Group (LSE: DOM).
Although the share price is still below what I paid for it, it has been getting closer to that point again.
The share price is up 31% so far this year, a much stronger performance than the 11% gain in the FTSE 250 index (of which it is a member). That strong share price momentum will continue, I hope.
Meanwhile, even after that increase in value, the dividend yield is still an attractive 5%.
I have no plans to sell my shares. In fact I think that even at this price, the dividend stock is worth considering.
A simple business model in a complex market
At first glance, Domino’s might seem to be in a very strong position.
The British franchisee of the iconic US pizza brand streamlined its focus over recent years and moved out of markets that were a distraction from its core UK operation.
It has strong brand awareness, an active loyalty scheme, economies of scale and a proven business model.
However, things have not been as smooth as that may suggest (helping explain why the share price is still below what it was when I bought). Pizza fatigue has set in among some consumers, so even though Domino’s has a strong market position it has been battling a lacklustre pizza delivery market overall.
Another risk is that weakening consumer confidence is hurting some people’s willingness to splash out on takeaway food.
Pizza fatigue has been exacerbated by a surge in the popularity of chicken. Protein-rich diets and other trends have fed into this and may continue to do so.
To its credit, Domino’s management has embraced this potential threat as an opportunity, with its own Chick ‘n’ Dip product offering. It said last month that customer feedback has been “highly positive”.
On the up, but lots still to prove
Having had a positive first half overall, Domino’s continued its momentum in the third quarter, with total system sales growing 3.5% year on year.
Like-for-like sales growth was still positive, although weaker than in the first half. That suggests Domino’s has its work cut out to try and stave off the challenge posed by weakened consumer confidence and the impact on discretionary spending I mentioned above.
This is where a strong brand and extensive loyalty programme can help it, I reckon. It is a simple business model with clear levers for management to pull even as the consumer demand landscape evolves.
The first half saw a 3% year-on-year increase in the interim dividend on the back of 75% year-on-year growth in underlying free cash flow.
If management can keep moving the business forward and growing profitably, I see ongoing scope for further dividend growth.
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Christopher Ruane owns shares in Domino’s Pizza Group.
This story originally appeared on Motley Fool
