Will Starbucks or Domino's Pizza be the better dividend-paying stock to invest in for the next five years? 7investing CEO Simon Erickson compares the two companies in today's Summer Stockpicking Challenge matchup.
July 17, 2023
Welcome to our 7investing Growth vs Income Summer Stock Challenge! We are on a quest to find the best current stock opportunity for investors.
All month, we’re pairing popular “growth” and “income” stocks up in head-to-head matchups — to ultimately determine which stock will provide the greatest upcoming five-year return. We’ve included voting polls within this article: please help us determine which of these stocks represents the better current opportunity for investors!
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In this “Income Style, Round 1, Matchup 1” bracket, our #2 ranked global coffeehouse Starbucks (Nasdaq: SBUX) is paired up against #7-ranked pizza chain Domino’s Pizza (NYSE: DPZ).
Both of these companies serve hundreds of millions of people all across the world. Yet today’s matchup isn’t about who serves the tastier food; it’s about who will serve the greater return for investors. Starbucks owns half of its locations, while Domino’s is almost entirely franchises. These two different approaches to the business structure could be the factor that determines their ultimate returns.
What do you think? When looking over the next five years, which of these two companies will prove to be the better investment?
What better way to start the day than coffee and pizza?
Our "Summer Stock Challenge: Growth vs. Income" continues today with…. $DPZ vs. $SBUX!
Which one of these companies will have higher returns over the next 5 years?
— 7investing (@7investing) July 17, 2023
Starbucks is the world’s largest coffee chain. Its 34,640 locations are each playing a major role in keeping us all highly-caffeinated and productive.
Starbucks owns and operates half of those locations, keeping tight controls on operating efficiencies. The other half of its locations are licensed stores (common in airports or bookstores), who sell licensed products from the parent but then handle all of the real estate costs and maintain their own operational control. Starbucks’ licensed locations in the US (46% of total locations) pay a 7% royalty of total revenue and an additional 1% for marketing and advertising.
The chain has invested heavily in technology to make it easier for customers — especially the 30.8 million people in its loyalty program — to place orders in the mobile app and to skip the line. Global comparable store sales increased 11% year-over-year, driven by a 6% increase in transactions and a 4% increase in ticket size.
Long-time (former) CEO Howard Schultz has repeatedly described Starbucks as “not a coffee company…but a people company” in reference to its extensive employee training and focus on the customer experience. This is becoming increasingly important, as two-thirds of orders are now customized based on the consumer’s unique preference. Starbucks’ new strategic Reinvention Plan is addressing this, investing heavily in new equipment and in retraining its workforce to further optimize the customer experience. The company plans to invest $450 million in North America to retrofit existing stores and add 2,00 new locations, while also planning to increase its store count in China by 13% annually through 2025.
Yet even after fulfilling the needs of the business, there’s still plenty of cash to share to investors. Shareholders have received 52 consecutive quarters of dividend payouts — uninterrupted even by a few difficult quarters during COVID — as Starbucks has grown its dividend and a compound annual growth rate of more than 20% during that time. Its $2.3 billion of dividend payments during the past twelve months represented 6.7% of total revenue. Said another way, nearly 7 cents of every dollar spent at Starbucks during the past year got paid right back out as cash to its investors.
Starbucks faces risks associated with managing a global supply chain, ingredient and labor inflation, and its 100% company-owned footprint in China (which is 16% of its total store count). Yet its ubiquitous brand recognition and the margin expansion outlined in its new strategic plan provide plenty of reasons for investors to perk up and consider it an excellent buy-and-hold opportunity.
Domino’s Pizza is the world’s largest pizza chain. Its 6,708 American and 13,300 international locations have been serving hungry customers with baked dough, sauce, cheese, and toppings for more than 60 years.
99% of its locations are franchises, which are a bit more specific and detailed than Starbucks’ licensed stores. Domino’s similarly lends the brand and sells ingredients to the franchise, but also designates the location of delivery allowed for its location. Domino’s also handles all of the marketing and promotion for its franchises, including national advertising and special new product introductions. American franchisees (33% of total locations) pay a 5.5% royalty of total revenue to operate and then an additional 6% for marketing.
Domino’s might be thought by many as “just a pizza company”, yet a more accurate description might be a “cash flow gushing machine.” Its asset-light franchise model generated an incredible 56% return on invested capital last year — which is even higher than tech companies like Apple, Tesla, and Alphabet.
Domino’s has committed to paying its tasty cash flows out to investors as dividends. Its annual payout of $4.51 per share has increased 113% in the past five years and currently yields 1.2% (as of today’s $384 stock price).
Inflation has chomped into Domino’s profit stream in recent years, largely due to the rising costs of ingredients, fuel, and labor. The company has maintained the price points on its menu, offsetting its rising costs with efficiency gains. 75% of its US sales come from digital channels, including easy orders on its mobile app from the 29 million people enrolled in its “Piece of the Pie” loyalty program.
Investors should embrace Domino’s strong brand, efficiency, and incredible profitability. Pizza never goes out of style, making Domino’s well-poised to satisfy investors for several more years to come.
Will Starbucks or Domino’s Pizza be the better investment for the upcoming five year period? Cast your vote in our live poll below!
What better way to start the day than coffee and pizza?
Our "Summer Stock Challenge: Growth vs. Income" continues today with…. $DPZ vs. $SBUX!
Which one of these companies will have higher returns over the next 5 years?
— 7investing (@7investing) July 17, 2023
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