Domino’s Pizza (NYSE:DPZ) is gearing up to unveil its Q1 financial results on Monday, April 29, before the commencement of trading hours. With forecasts pointing towards positive momentum, augmented by the recent 25% hike in dividends and ongoing share repurchase initiatives, DPZ stock currently presents an attractive proposition for investors. Moreover, the elevated premiums of out-of-the-money (OTM) put options offer income opportunities for savvy investors.
As of today, April 23, DPZ stock is trading around $478, registering a modest 1.4% uptick. However, this figure reflects a decline from its recent peak of $506.34 observed on April 10. The announcement made on February 26 regarding a 25% increase in the dividend per share (DPS) to $1.51 quarterly ($6.04 annually), along with a $1 billion augmentation in its share buyback program, has bolstered investor sentiment.
Analysts foresee a higher price target for DPZ stock, with the average of 28 analysts’ estimates on Yahoo! Finance pegging it at $504.93, indicating a potential uptick of 5.1% from the current price. AnaChart, a nascent sell-side analyst tracking service, reports an even more bullish outlook, with 33 analysts projecting an average price target of $522.01, signifying an increase of 8.67%.
Despite these optimistic projections, DPZ stock could potentially soar further based on its historical dividend yield. Over the past four years, the stock has maintained an average dividend yield of 1.0% and even 0.60% over the last five years. With the current yield standing at 1.26%, there exists the prospect of DPZ stock climbing to $604 per share, indicating a surge of 26.3%. Furthermore, utilizing the five-year average yield, the potential price target could surpass $1,000 per share.
The recent 25.1% uptick in Domino’s Pizza’s free cash flow (FCF) in 2023 to $485 million compared to 2022’s $388.1 million, alongside an improvement in its FCF margin from 8.55% to 10.8%, despite a slight decline in sales, reinforces the bullish sentiment. Even with a lower FCF margin of 8.7% in Q4, the stock is still undervalued considering the potential FCF estimates for 2024 and 2025.
Based on analysts’ projections of $4.81 billion in sales for 2024, the potential FCF estimate ranges from $481 million to $520 million, indicating room for growth. Using a 2.5% FCF yield metric, Domino’s Pizza could be valued at $20.8 billion, representing a 24.5% increase over its present market capitalization of $16.7 billion. Consequently, DPZ stock price could climb by 24.5% to almost $600 per share.
In light of these compelling metrics, shorting OTM put options presents an intriguing strategy for investors. For instance, the May 17 expiration period offers attractive premiums for puts with strike prices below the current market value, thereby enhancing the potential yield for investors.
In conclusion, Domino’s Pizza (NYSE:DPZ) stock is poised for potential appreciation, driven by robust Q1 earnings and anticipated FCF results. With OTM put options providing income opportunities and favorable valuation metrics, DPZ stock appears undervalued and presents an opportune entry point for investors seeking growth potential.
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