Why Domino's Pizza Stock Is a Perfect Fit for Warren Buffett's Portfolio

Shares of Domino's Pizza (NYSE: DPZ) are jumping on news that billionaire investor Warren Buffett has added the stock to his portfolio. It's a noteworthy development given that Buffett has been fairly cautious over the past year, opting to sell stocks and add to his cash position rather than buy into the current market rally. And so for him to buy Domino's Pizza is a sign to many investors that it could be a great buying opportunity.

A closer look at Domino's does indeed suggest that this may be a prototypical Buffett stock. Here's why it shouldn't come as a big surprise that he decided to buy the stock.

Domino's has an iconic customer brand

One thing you'll notice with Buffett's company, Berkshire Hathaway, is that many top brands are its largest holdings. And by top brands, I'm talking about names that will be largely recognizable to most consumers: Apple, Kraft Heinz, American Express, and Coca-Cola. They have been staples in the Berkshire portfolio for years and they are typically among the largest holdings.

These are businesses that need minimal, if any, introduction given how well known their operations are. While investors may not know about all of the latest Apple products or the brands Coca-Cola has acquired, their core operations are no mystery.

Domino's fits into that mix fairly well. The company has been around for more than 60 years and is a leading pizza brand whose logo is highly recognizable all over the world.

Its earnings are largely predictable

Another reason Domino's is the type of stock that would appeal to Buffett is for the predictability it offers. While Domino's has evolved over the years and is utilizing electric vehicles for deliveries, at its core, its business concept is still simple in that it's making and delivering pizzas to its customers. It has averaged a profit margin of more than 12% over the trailing 12 months, and staying in the black hasn't been a problem for Domino's in the past.

As the business has scaled its operations, both its revenue and profits have been moving at fairly fast rates. But what's a particularly great sign is that the bottom line has risen at a faster pace than revenue over the past decade.

DPZ Revenue (TTM) data by YCharts

It pays a growing dividend

Domino's also pays a modest dividend that yields 1.3%, which is in line with the S&P 500 average. Buffett likes dividend stocks and the ability to collect a reliable payout, which may be a bit ironic given that Berkshire itself doesn't pay a dividend to its shareholders.

What's even more attractive is that Domino's has also generously increased its dividend payments in recent years. Its current quarterly dividend of $1.51 has more than doubled from the $0.65 that the company was paying its shareholders back in 2019. Whether or not that kind of pattern continues is uncertain, but it's clear that management has prioritized redistributing profits back out to shareholders.

Is Domino's stock still a good buy after its rally?

Thanks to the Buffett rally, shares of Domino's are up and at levels they haven't been at since July. The stock is trading at a price-to-earnings multiple of 28, which isn't cheap when you consider the business is growing in just the single digits right now.

Domino's can be a good, stable, long-term buy, but investors shouldn't simply hop on the bandwagon because Buffett bought the stock. There are many other Buffett-type stocks out there with good fundamentals that may be just as good, or potentially even better buys to consider.

While Domino's can make for a dependable investment, my concern is that with a bit of a rich valuation, its returns may be limited from here on out; there could be better growth stocks for investors to consider right now.

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American Express is an advertising partner of Motley Fool Money. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and Domino's Pizza. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.