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Domino’s (Nasdaq: DPZ), the world’s largest pizza chain, just reported its fourth quarter and full year 2024 results.

Same-store-sales at existing locations grew a modest 3.2% domestically in the US and 1.6% internationally. After factoring in the 775 net new stores it opened, overall revenue grew 5.9% for the full year (in constant currency).

The pizza chain is methodical about building new locations, and its free cash flow increased 5.5% to $512 million in 2024. Free cash flow is what gets deposited into the bank a company pays all of its capital expenditures; it represents the capital available to reward long-term investors.

With that in mind, Domino’s spent its 2024 free cash flow primarily on making share repurchases and on paying cash dividends.

Let’s take a closer look at each of those.

Share Repurchases

It spent $327 million to repurchase 758,242 fully-diluted shares during the year for an effective price of $431 per share.

Yet the picture looks a bit less rosy when we also factor in the stock-based compensation Domino’s pays, especially to its executives.

The company issues restricted stock awards, performance-based stock awards, and stock options to its top-brass as a way to financially compensate them using equity rather than cash. As an example, CEO Russell Weiner only received a base salary of $875,000 last year, but he also received $5.3 million in stock awards and executed $1.7 million worth of stock options. Other top-brass executives similarly received several millions of dollars last year in awards and options.

Collectively, Domino’s issued 348,000 new fully-diluted shares in 2024 that were tied to employee or executive compensation. When reducing the 758 thousand shares it bought back by the 348 thousand new shares it issued, it only really repurchased 410,000 shares on a net basis. Considering the $327 million it spent on those, it’s effective price was actually closer to $798 per share.

Altogether, Domino’s spent 63.8% of its free cash flow in 2024 on share repurchases.

Some critics might contend that Domino’s executive compensation plan has a few too many toppings. But let’s move on.

Dividend Payments

In addition to the repurchases, Domino’s also spent $210 million during 2024 on dividends. These are cash payments that arrive quarterly into the brokerage accounts of all active shareholders. Domino’s paid $1.51 per share each quarter, totaling $6.04 per share during fiscal 2024. Based on this morning’s price of $447, Domino’s stock currently represents around a 1.3% dividend yield.

Altogether, Domino’s spent 41.0% of its free cash flow in 2024 on dividends. 

Its Board also just announced it would be increasing the dividend by 15%, paying $1.74 per share quarterly beginning in 2025.

The 7investing Key Takeaway

Don’t get me wrong; I love shareholder-friendly management teams that are committed to reducing the overall share count and to paying us cash every quarter.

But Domino’s capital allocation decisions made me half-raise an eyebrow this quarter. Its triumphant 15% dividend raise it three-times faster than its fundamental free cash flow growth. And this also comes at a time when it’s already paying out more than 100% of its free cash flow on dividends and buybacks.

That means that unless Domino’s grows its free cash flow at a faster rate in 2025, it will inevitably need to 1) spend less on buybacks this year (or reduce the new shares issued for executive compensation), 2) reduce its cash balance to fully-fund the buyback and dividend, or 3) take on debt to fund the buyback and dividend while maintaining the consistent cash balance.

This is still a well-made company who’s been baking excellent shareholder returns for decades. But astute investors might also recognize that it’s running out of slices to ensure that everyone’s getting fed.