Investing In Pizza Industry Dividend Stocks
The U.S. pizza industry is large by most measures accounting for over $36 billion in annual sales. Surprisingly, it is the independent pizza restaurants that collectively account for the largest slice of the sales pie controlling about 40% of the market. The big three pizza chains Pizza Hut, Domino’s and Papa John’s account for 15%, 9% and 6% respectively. The remaining control is divided among other smaller chains such as Little Caesars and others.
Of course, being an income and dividend-centric investor I am only interested in the pizza stocks that can actually pay me an ever increasing income over time. That being said, only a handful of pizza companies in the U.S. pay out dividends which will be the focus of this article.
Delivering our first dividends is one of the largest quick serve restaurant companies in the world, Yum! Brands, Inc. (YUM). Owners of the iconic Pizza Hut, Taco Bell and KFC restaurant chains, YUM currently offers a decent yield of 2.30% with a moderate payout ratio of 48.5% based on current cash flow. The dividend is considered safe at present while the stock also has a pretty impressive five year annualized dividend growth rate of 15.12%. YUM can definitely be considered a growth stock despite its decent yield as expansion into China and India are rapidly increasing. Buying into YUM also has the advantage of enabling ownership in three very large successful brands providing the investor with “restaurant diversification.” Looking at the valuation of YUM the current PE is 27.16 making it quite expensive relative to the S&P but in line with industry peers. High PEs often accompany higher growth stocks. Forward PE looks a lot more reasonable at 18.09.
Our next slice of dividends comes from another company that needs no introduction, Domino’s Pizza, Inc. (DPZ). Operating under its namesake, DPZ currently yields a relatively low 1.30% with a moderately low payout ratio of 41.0% based on current cash flow. While not having a very long dividend history, DPZ does have a very impressive stock chart rising from about $3 a share in November 2008 to over $77 a share today. Like YUM, DPZ has a similar PE of 28.87 placing it in line with peers. Forward PE is also expensive at 23.26. As you can imagine the DPZ stock might be a little too hot to handle at current prices.
One reason DPZ and other commodity based companies might be experiencing business tail winds is the result of lower input costs as commodity prices have been crashing in recent weeks. Whether it’s weakened demand, supply glut via bumper crops, stronger U.S. dollar or in some cases all three reasons, commodities have been heading lower. Essential ingredients, such as wheat for pizza dough have been falling dramatically. In fact, wheat prices are at or near four year lows. I know many dividend investors have been eyeing energy companies as oil has dropped but many food companies might also enjoy a more favorable business climate as their input costs go down.
Our last piece of the dividend pizza pie is another retailer that needs no introduction, Papa John’s International Inc. (PZZA). Operating under its namesake as well, PZZA currently yields a low 1.40% with a payout ratio of 32.7% based on current cash flow. This is another safe dividend with room for future growth. While lacking an extensive dividend history, the growth of PZZA has been nothing less than stellar. Clearly, each of the three companies mentioned, while not current high yielding stocks, do offer continued fast growth opportunity in the pizza industry. On the valuation side PZZA has the lowest PE of the three companies mentioned at 25.91. Forward PE is a more reasonable 20.26 which indicates a company that is still experiencing rapid growth relative to YUM and DPZ.
Clearly, each of the dividend paying pizza companies mentioned are experiencing continued rapid growth. Whether it is foreign growth for YUM’s Pizza Hut chain in China and India or tremendous growth domestically for DPZ and PZZA. The sales and growth of these companies cannot be discounted and while the initial yield may not get you too excited, potential for rapid dividend growth should, especially since the overall industry will be experiencing some much needed business tail winds with falling commodity pricing. I expect continued favorable earnings reports as long as current conditions persist.
Are any of these pizza stocks delivering quarterly dividends in your portfolio? Also, what are your thoughts about decreasing input costs for these restaurants and others. Please let me know below.
Disclosure: Long YUM