How Domino's Pizza Earned a Place in Berkshire Hathaway's Portfolio

In the third quarter of 2024, Berkshire Hathaway bought 1.28 million shares of Domino's Pizza (NASDAQ: DPZ) and has added to its position three times since. Berkshire now holds 2.6 million shares worth more than $1 billion. While not a big percentage of Berkshire's overall portfolio, it's notable that the conglomerate has bought shares on four different occasions over the last year, as it has been a net seller of stocks for 11 quarters in a row.

Warren Buffett has not spoken publicly about Berkshire's decision to buy Domino's stock. But in 2014, he said he gets "euphoric" when stocks he's buying go down. "I love it when the things we buy go down. I get euphoric -- you know the stocks are down today and I'm buying more of something I was buying yesterday -- I'm buying it cheaper," he told Fortune.

The Oracle of Omaha must be happy about Domino's stock performance over the last year. Shares have fallen about 20% since the summer of 2024, when Berkshire began building its position. Year to date, they are down 2% and are trailing the S&P 500's 17% run in that time frame.

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Shares flat as international headwinds drag performance

In the fiscal first quarter, Domino's shut down about 200 stores abroad because of, in Chief Financial Officer Sandeep Reddy's words, "a tough macro environment" amid "a slowing across restaurant industry sales." International same-store sales growth of 1.7% certainly lagged same-store sales growth of 5.2% in the U.S.. And management expects U.S. same-store sales growth to fall to 3% in the 2025 fiscal year, citing downside from macroeconomic challenges.

Shares rose 4% after the Oct. 14 earnings report but have since drifted back down. With revenue growth of just 3% year over year, it's clear that crimped consumer spending and falling consumer confidence are taking a toll on the business.

For context, Domino's flat share returns are marginally better than those of AdvisorShares Restaurant ETF (NYSEMKT: EATZ), a fund that tracks a handful of fast-food stocks, which is down 4% year to date.

Even so, that slight sector outperformance is scant comfort to shareholders who have watched the S&P 500 zoom up 17% year to date. Yet, Berkshire keeps adding to its position. Why?

Buffett's "very big mistake"

In his 1999 letter to shareholders, Buffett said he needed to confess to a misstep that had hurt Berkshire that year.

Saying that shareholders would have been better off in 1998 "if I had regularly snuck off to the movies during market hours," Buffett called his decision to sell McDonald's (NYSE: MCD) shares "a very bad mistake." At a 1999 shareholder conference, he elaborated, saying that the decision had cost Berkshire over a billion dollars.

That mistake looks even more costly now. Since January 1999, McDonald's shares have risen from a split-adjusted $20.95 a share to $305 per share, a 1,355% rise. The company has raised its dividend by 3,600%, and Berkshire's 30.2 million-share position, which cost $1.3 billion in the late 1990s, would be paying $450 million in dividends a year today.

In previous shareholder letters, Buffett has pointed to stocks like Coca-Cola (NYSE: KO) as examples of "the secret sauce" of Berkshire's success, because Berkshire now collects about half as much as its initial investment back as dividends from these companies each year. The same would be true of McDonald's, so it surely pains Buffett to be missing out on that growing income stream.

Therefore, he can't fail to be aware of Domino's exploding dividend.

12 years of dividend growth totaling 2,576%

Since 2004, Domino's has grown its dividend from a quarterly payout of $0.065 per share to $1.74 per quarter, showing McDonald's-like dividend prowess. This includes a 15.2% dividend increase earlier this year.

This is the kind of robust dividend growth that Buffett cherishes in investments. And as long as Domino's can keep doubling its dividend every few years, Berkshire is unlikely to sell.

That's not all about dividend growth, of course. A growing dividend is possible only if earnings grow alongside it. In the case of Domino's, earnings growth shows no sign of slowing, not even amid the macroeconomic backdrop that is dragging down share price. Earnings grew 21.5% last quarter, more than double the 9.2% earnings growth that S&P 500 companies have reported for Q3 so far.

Domino's dividend growth outlook appears even safer when you consider the company's dividend payout ratio, or the percentage of net earnings it uses to pay its dividend. It stands at 39%, which is at the low end of the 35% to 55% range considered healthy for dividend-paying stocks.

Finally, there's the company's share buyback program to consider. Domino's repurchased 166,000 shares last quarter, paying $75 million for them, with plans to buy back another $540 million worth of stock.

Share buybacks make dividends more sustainable by reducing the number of shares a company must pay dividends to. In addition, they naturally boost earnings per share by shrinking the numerator (the shares outstanding) that earnings are divided by. This shareholder-friendly, tax-efficient way to improve earnings is one reason Buffett himself loves buybacks.

Macroeconomic winds come and go, but this is a company with the fundamentals to carry on dividend increases for years, perhaps decades. For this reason, it's earned a place in Berkshire's portfolio and is a buy for investors seeking growth and income today.

William Dahl has positions in Coca-Cola. The Motley Fool has positions in and recommends Berkshire Hathaway and Domino's Pizza. The Motley Fool has a disclosure policy.