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Domino's Pizza (DPZ) recently hiked its dividend by 15% on Feb. 24. As a result, DPZ stock still looks cheap based on its historical yield average. Moreover, 1-month out-of-the-money put options offer short-sellers a 2.0% monthly yield.
DPZ has risen over the last month from a low of $402.33 on Jan. 10 and closed Thursday at $471.28. Today it's trading at about $460. This article will show that DPZ still has +17% upside to $538.28 based on its historical yield averages. That makes it very attractive to short sellers of near-term put options with one-month yields of 2.0%.
I discussed this strategy in my last Barchart article on Feb. 24, “Domino's Pizza Hikes Its Dividend 15% - DPZ Stock Looks Undervalued.” At the time, DPZ was at $45,0 and the article discussed how DPZ could be worth $538.28 per share.
Moreover, the article discussed shorting the $430 strike price put option that expired on March 21. The premium that could be earned was $6.50 for three weeks, or a yield of 1.51% (i.e., $6.50/$430.00).
As it turned out, those options expired worthless. So the cash-secured short seller of these puts not only kept this income, but also had no obligation to buy shares at $430.00. Moreover, existing investors in DPZ at the time who also shorted these puts made extra income.
Price Targets
Domino's Pizza announced on Feb. 24 that it raised its annual dividend per share (DPS) by over 15.2% from $6.02 to $6.96. In my Feb. 24 Barchart article, I showed that Domino's could easily afford this increase, given its strong free cash flow (FCF) and FCF margins.
So, today the stock has a dividend yield of 1.50%:
$6.96 DPS / $460 = 0.015
But that is much higher than its historical yield average. As a result, if DPZ stock were to trade at the average yield, it has significant upside.
For example, Morningstar reports that its average for the past 5 years has been 0.98% and its trailing 12-month (TTM) yield average has been 1.33%. Yahoo! Finance shows that its 5-year average has been 1.04% and its TTM average yield is 1.28%.
However, a closer look using the annual yield averages on the Morningstar site shows that during 2020 and 2021, the yields were well below 1.0%.
So, if we use just the average of the last 3 years, the average is slightly higher:
2022 …… 1.27%, 2023 …… 1.17%, 2024 ……1.44%
Last 3 years' average = 1.2933%
As a result, we can set a price target using this average yield:
$6.96 DPS / 0.01293 = $538.28
This means that if the stock eventually trades at a price where its dividend per share produces a yield equal to its historical average, the stock could rise to $538 per share. That is over 17.5% higher than today's price ($538.28/$457.82 = 1.1757). In other words, DPZ stock looks reasonably cheap here.
Analysts Agree
Sell-side analysts still see DPZ stock as undervalued. For example, Barchart's survey shows a mean price target of $489.38, and Yahoo! Finance's survey of 34 analysts shows an average of $487.24 per share.
However, AnaChart.com, which covers analysts who have recently written on the stock, shows that 27 analysts now have an average price target of $529.24. That is close to my target of $538.28, shown above, that I derived using its historical dividend yield.
The table below from AnaChart shows that the analysts with the best track records all have significantly higher price targets on DPZ.
For example, Jon Tower of CITI, who has a record of 93% in meeting past price targets he set, has recently raised his price target to $520, up from $440. Others have lowered their price targets, but the average of these 5 top analysts is $499.00 per share, or +8.4% higher than today's price.
One way to play this is to sell out-of-the-money (OTM) put options, in order to gain extra income.
Shorting OTM Puts
For example, look at the April 25, 2025, expiration period, which is 29 days to expiry (DTE). It shows that the midpoint premium for the $445.00 strike price put option has a premium of $7.70 per put contract.
That provides a cash-secured short-put investor a one-month yield of 1.73% (i.e., $7.70/$445.00 = 0.0173).
An investor who secures $44,500 in cash or buying power with their brokerage firm can enter an order to “Sell to Open” 1 put contract at the $445.00 strike price. The account will then immediately receive $770 in the account, if the trade is executed at the midpoint.
As a result, the investor stands to make a good return for a strike price about 3% below today's price. Moreover, the breakeven point is much lower: $445.00 - $7.70 = $437.30, or 4.3% below today's price.
That provides the cash-secured put investor a good expected return (ER), assuming that this play could be repeated each month. For example, over a 3-month period, the investor stands to make an ER of over 5% (i.e., 1.73% x 3 = 5.19%).
However, if the stock falls below this breakeven point, the investor has downside risk. It could result in the account being assigned to purchase 100 shares per put shorted. That is why there is collateral and the trade is “cash-secured.” This might mean an unrealized capital loss until the stock rises over the breakeven point.
As a result, investors should study these risks. One way to do this is to review the Barchart Options Education sections, such as the Options Learning Center and the Options Trading Risk tabs.
Nevertheless, the bottom line is that DPZ stock still looks undervalued here, based on its average historical yield and analyst price targets. One way to play this, to set a lower buy-in target, and, for extra income, is to sell short out-of-the-money put options in nearby expiry periods.
