In Q3, stock market guru Warren Buffett made a notable move. Over the quarter, he bought more than half a billion dollars worth of Domino’s Pizza (NYSE: DPZ) shares for his investment company Berkshire Hathaway.
Should investors consider following Buffett and grabbing a slice of Domino’s for their own portfolios? Let’s discuss.
Investing choices
There are a number of different Domino’s Pizza stocks on the market today. There’s the US-listed stock, which offers exposure to the US market and international franchises. There’s the London Stock Exchange (LSE)-listed Domino’s Pizza (LSE: DOM) stock, which offers exposure to the brand in the UK and the Republic of Ireland. And then there’s an AIM-listed stock, DP Poland, which offers exposure to the chain in Poland and Croatia.
Naturally, Buffett invested in the US-listed stock, which is the largest by a wide margin.
Buffett’s new stock
Now, US-listed Domino’s definitely has some great attributes from an investment perspective. For starters, there’s the brand. According to Statista, Domino’s is the most popular pizza brand in the world.
Secondly, the company has a great long-term track record when it comes to generating wealth for investors (one thing Buffett definitely likes to see). Over the last 20 years, the stock’s risen about 2,500%.
Additionally, the company has a strong balance sheet and is growing its dividend at a rapid pace. Over the last five years, the payout’s more than doubled (the yield‘s still pretty low at around 1.3%).
But for me, the valuation isn’t so attractive today. With analysts expecting the company to generate earnings per share of $17.60 next year, the forward-looking price-to-earnings (P/E) ratio’s 26.1.
That’s high for a fast-food company. And it doesn’t leave much room for setbacks or challenges (like a shift to healthier eating or fancier pizzas).
So I’m not convinced that following Buffett into this stock is the best move right now. For me, the risk/reward proposition isn’t enticing.
The UK Domino’s is cheaper
Looking at the LSE-listed Domino’s Pizza stock however, it’s a different story. Currently, the forward-looking P/E ratio on this stock’s only 15.4. So the valuation’s considerably lower. Meanwhile, the dividend yield’s higher at around 3.4%. So the stock could provide some decent income.
It’s worth noting that, like its US-listed peer, this stock has a great long-term track record in terms of shareholder returns. Over the last 20 years, it’s risen about 1,400%. That’s not as high as the return from the US-listed stock, but it’s still an incredible return (it would have turned £5k into £75k).
Of course, the UK and Irish markets are much smaller than the US market. This factor could limit opportunities for growth going forward.
Consumers in the UK also have less disposable income than those in the US. This could have an impact on future returns. Overall though, I see appeal in the UK version of Domino’s stock today. I think it’s worth considering for a diversified investment portfolio.
The post Should investors follow Warren Buffett and invest in this well known pizza company? appeared first on The Motley Fool UK.
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Edward Sheldon owns shares in London Stock Exchange. The Motley Fool UK has recommended Domino’s Pizza Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
