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Domino's Pizza (DPZ) stock is a favorite among value investors. The bottom line is that people still eat pizza during recessions and market crashes, and there is no tariff effect. DPZ looks like a good buy here.
DPZ is at $438.33 in midday trading on Monday, April 7. That is slightly down from a recent peak of $468.35 on April 2, prior to the tariff-induced market crash. But value investors love a bargain, especially from a strong free cash flow (FCF) company like Domino's.
Dividend Yield Price Targets
I discussed the company's strong FCF and its recent 15% dividend hike in a March 28 article, “Domino's Pizza Stock Looks Cheap Based on its Historical Yield - Shorting Puts Works Here,” and a Feb. 24 Barchart article, “Domino's Pizza Hikes Its Dividend 15% - DPZ Stock Looks Undervalued.”
The point is that Domino's now has a $6.96 annual dividend per share (DPS), which gives DPZ stock an attractive yield:
$6.96 DPS / $438.33 price = 0.01588 = 1.578% yield
This is well over its average yield over the trailing 12 months (TTM) has been 1.41% according to Morningstar and 1.36% using Yahoo! Finance statistics. Therefore, using a mean TTM figure of 1.385%:
$6.96 / 0.01385 = $502.53 target
That is 14.6% higher than today's price of $438.33. In other words, if DPZ stock were to trade at its average yield over the last year, it could rise almost 14%.
On top of this, Morningstar reports that the stock's 5-year average yield has been much lower at 0.98%, and Yahoo! Finance agrees (1.05%). At the midpoint of 1.015%, this means DPZ could be worth +56% more:
$6.96 / 0.01015 = $685.71 target
$685.71 / $438.33 today = 1.564 -1 = +56.4% upside
This implies substantial upside in DPZ stock. One way to play this is to sell short out-of-the-money (OTM) put options. That way, an investor can set a lower buy-in target and still get paid to wait for the target price to be hit.
Shorting OTM Puts
I discussed this in my last article, suggesting that selling short the $445.00 put for the April 25 expiry period would be worth the $7.70 premium. Even though that play is now in-the-money (ITM) - i.e., the trading price is lower than the put strike price, the investor is still profitable.
For example, the breakeven point for that trade is $445.00 - $7.70, or $437.30. That is still below today's trading price of $438.33.
However, investors who completed that play have an unrealized loss on the short play, as the $445.00 strike price presently trades for $25.60 on the ask side. They may have to accept an assignment and then hold the shares, sell out-of-the-money calls (i.e., covered calls), or do more out-of-the-money short-put plays. Or they can roll this trade over
For example, the May 9 expiry period shows that the $425.00 strike price has a $21.20 midpoint premium. New investors in the play can make an immediate yield of almost 5% (i.e., $21.20/$425.00) with a 5% lower strike price - a much lower entry price.
But for investors who want to roll their April 25 trade over, here is how that would work. The investor could “Buy to Close the April 25 short-play at $25.60 and then “Sell to Open” the May 9 put for $21.20. That results in a net debit of $4.40. But, overall, the trade is still profitable:
$7.70 original premium - $4.40 net debit = $3.30 net credit
Based on the new $425.00 strike price, that works out to a yield of 0.77% (i.e., $3.30/$425.00). The point is that the investor has reduced the potential for an unrealized capital loss and reset the trade to have a lower buy-in price.
However, some investors may not want to do a rollover, as they may be comfortable with a $445.00 exercise (i.e., at the original breakeven price of $437.30. After all, holding DPZ at that price provides an annual dividend yield of 1.59%, which is well over its TTM and 5-year average yields.
The bottom line is that DPZ stock looks cheap here. After all, people still eat pizza, even during market crashes and recessions.
