The Domino's Pizza Enterprises Ltd. (ASX: DMP) share price is down 6.1% so far in 2019, which is why I think it's a good time for investors to add this company to their portfolios.
Background on Domino's Pizza
Domino's Pizza operates retail food outlets and oversees franchises. The company has franchise rights for the Domino's brand in Australia, New Zealand, France, Belgium, the Netherlands, Japan and Monaco.
Why I think it's a buy
Domino's Pizza trades on a price-to-earnings (P/E) ratio of 20.84x. While this may appear high against the ASX 200, which has a P/E ratio of 18.06x, a higher valuation is reasonable for Domino's given the company's profit growth. Domino's profit growth is remarkable, with average profit growth over the last 10 years higher than 25%. While this may change for one or two accounting periods, it is a long-term trend that is likely to continue as the group expands its proven business model into new markets.
The company trades on a grossed-up dividend yield of 3.44%. This is not a bad return given that the cash rate is only 1% at the time of writing. In addition, shareholders can rest assured that dividends have grown every year in recent memory and are likely to continue doing so. Indeed, dividends increased a little more than 900% between the 2009 and 2018 financial years. This is promising and makes a strong investment case for Domino's.
In the company's half-year media release in February, its management reaffirmed that growth is set to continue, boasting that the company will continue opening new stores. In addition to organic growth, acquisition of another pizza chain with rebranding to Domino's in Germany helped to drive sales higher. Revenue for the first half of the 2019 financial year was $702 million, a 23.68% increase on the same period in the 2018 financial year, with most of this revenue coming from abroad.
Domino's does have significant gearing, with net debt of $509.1 million versus equity of $330.9 million. However, growth can come with risks and this debt is needed for Domino's to continue expanding at such a rapid pace. The group does boast interest cover of 16.2x, so it is certainly able to manage this risk.
While the group is currently facing some headwinds with employees in Australia claiming that they were underpaid, this is likely to have a short-term and temporary impact on the group overall and its growth.
Foolish takeaway
Domino's Pizza has experienced significant growth in recent years and this looks set to continue as it reaches new markets. It has a proven business model and is growing dividends. I think it's a buy.
