The Financial Strategic Review of a Public Company project was a quarter long assignment in which my group members and I were responsible to value a US-based mid-cap public company. Along with performing the valuation my team was responsible for: 1) Evaluating the risk profile 2) Describing investor returns 3) Analyzing the capital structure 4) Examining the dividend policyThe Financial Strategic Review of a Public Company project was a quarter long assignment in which my group members and I were responsible to value a US-based mid-cap public company. Along with performing the valuation my team was responsible for: 1) Evaluating the risk profile 2) Describing investor returns 3) Analyzing the capital structure 4) Examining the dividend policy

1. Domino’s Inc.
❖ GROUP 14
Sahej Kaur Arora
Lisa Niccole Recupero
Mimi Wan
Nikki Ghamami
Emma Kristine Parrish
Faiz Noorani

2. Corporate Governance
Section I

3. Domino’s Separates Ownership
and Management
❖ According to the employee agreement between Domino's and the Executives
the Executive will NOT directly or indirectly, own, manage, operate, control or
participate in any manner in the ownership, management, and operation.
Source: United States Securities and Exchange Commission

4. Qualified and Experienced Board of Directors
David A Brandon Richard E Allison C Andrew Ballard Andrew Balson Corie S Barry
Diana F Cantor Richard L Federico James A Goldman Patricia A Lopez
Source: Domino’s Board of Directors (Domino’s Website)

5. Domino’s Practices Independency
❖ Board of Directors (subject to NYSE) believe that a majority of the board
should be independent
❖ Board of Directors determine annually whether or not each director is
independent by assessing each directors material relationship with Domino’s
❖ All future non-employee directors will be independent
Source: Domino’s Website

6. Standards Defining Domino’s Independency
❖ Does not/has not received more than $120,000 direct compensation from
Domino’s other than director and committee fees in last three years
❖ Has not been employed by Domino’s in previous three years and has no
immediate family employed at Domino’s
❖ Has not been affiliated with or employed in a professional capacity by
present/former auditor of Domino’s
❖ Is not and previously have not been employed by executive officer of a company
for which Domino’s serves on compensation committee
❖ Is not an executive officer, or an employee/no immediate family who is an
executive officer, of another company that accounts for greater than 1,000,000 or
2% of Domino’s consolidated gross revenue
Source: Domino's Pizza Website

7. Domino’s has High Standards
for Management
❖ Domino's top management team is experienced, qualified, and has a strong
commitment to personal and professional integrity
❖ The top management are experts in their respective fields
❖ Example
➢ Lisa Price, the Executive Vice President and Chief Human Resources Officer
■ Served as senior vice president of human resources at Nordstrom
■ Lead human resources teams for key corporate functions including technology, data
science, finance, credit, strategy, legal, supply chain and store operations
■ 15 years experience at Starbucks supporting the company’s global expansion in a
variety of human resources roles
Source: Domino’s Website and Simply Wall

8. Richard E. Allison Tom Curtis Joseph H. Jordan Jeffrey Lawrence
Kevin S. Morris Lisa Price Russell Weiner Tim McIntyre
CEO Executive VP,
Corporate
Operations
Executive
VP,
International
Executive VP,
Chief Financial
Officer
Corporate
Secretary
COO, President of
the Americas
Executive VP,
Communication,
Legislative Affairs
Investor Relations
Source: Domino’s Website

9. Management Age and Tenure
❖ DPZ's management team is
considered experienced since it has
a 4 years average tenure
Board Age and Tenure
❖ DPZ's Board is considered
experienced since it has about 9
years average tenure
Long-tenured directors can be beneficial because of their deep
knowledge of the company acquired through service, the
continuity and stability they offer
Source: Simply Wall Street
Domino’s Board and Management has High
Experience and Tenure Averages

10. Corporate Governance Policies Assure
Compensation and Performance Standards
The board is single class with one year terms and no term limits
Board compensation:
❖ A Director should own shares, or hold vested shares, having a value of at least five
times the annual retainer amount
Performance:
❖ All board members must attend and actively participate in all scheduled meetings.
There will be a minimum of one meeting per year. Directors are also expected to
participate in education programs and interact with Institutional Investors, Press,
Customers, and Shareholders
❖ The Nominating and Corporate Governance Committee oversees
annual self evaluations of board members and committees
Source: Domino’s Website

11. Stockholder Analysis
Section II

12. Domino’s has a Variety of Investors
❖ Mutual fund holders - 54.93%
❖ Other institutional - 50.53%
❖ Individual stakeholders - 47.41%
❖ Institutional investors hold 105.46% of the outstanding shares
❖ Extremely high interest compared to other companies in Restaurants industry
➢ In the quarter of June 2019, investors purchased $2.9 million shares
Source: Yahoo Finance

13. Domino’s Does NOT List in Foreign Markets
❖ Domino’s Inc. only has shares outstanding in the New York
Stock Exchange
Source: Domino’s Website- Investor’s

14. Large Institutional Ownership of DPZ
❖ The high percentage of shares are held
by institutions like
➢ BLACKROCK INC.
➢ CAPITAL WORLD INVESTORS
➢ VANGUARD GROUP INC.
Source: Money CNN

15. DPZ Shareholders Have not Been Meaningfully
Diluted
❖ Shareholders have not been meaningfully diluted in the past year
➢ More dilution = Existing shareholder value decreasing
Source: Simply Wall Street - DPZ

16. Insider Trading has Increased in the Past 3
Months
❖ Independent Director, James Goldman, sold US $294k worth of shares at a price
of US $247 per share. Being an insider, he saw fit to sell at around the current
price of US $243
Source: Simply Wall Street - DPZ

17. Market Communication Favors “Buying”
As of December 2019, Domino’s has 28 analysts that cover the firm.
Recommendation:
❖ In December 2019, there were 28 ratings.
➢ Strong Buy (8), Buy (6), Hold (13), Underperform (1)
❖ The average recommendation rating is 2.2.
Analyst Price Targets:
❖ Average: $297.91, High: $337.00, Low: $208.00
Source: Yahoo Finance

18. Risk Profile
Section III

19. Earning Per Share has Increased Every Year
❖ EPS 2019: $9.07
❖ EPS 2018: $8.35
❖ EPS 2017: $5.83
❖ EPS 2016: $4.30
❖ EPS 2015: $3.47
Source: YCharts

20. High Financial Leverage but Less Than Industry
Average
❖ Average financial leverage: -1.180
Source: YCharts

21. Domino’s Cost of Debt is in the 60th Percentile
❖ Cost of Debt : 3.3%
Source: Finbox

22. Domino’s Company Rating is Bottom Tier
Investment Grade
❖ Domino’s rating: BBB+
Source: SPGlobal

23. Domino’s has Negative Stockholder Equity
❖ Implication of Negative Stockholders Equity
➢ Increased interest rates by banks
➢ Decrease in corporate valuations and credit ratings
➢ Unable to pay dividends to shareholders
➢ Fall in company stock price
Source: Wall Street Mojo

24. Gross Debt to Equity Ratio Indicates High Debt
❖ Total Liabilities (in thousands): $3,674,676
❖ Total Stockholders Equity (in thousands): $-2,935,649
❖ Debt to Equity ratio = total liabilities/total stockholders equity
➢ 3,947,306/-2,935,649 = -1.3
❖ 101.35% lower than Consumer
Cyclical sector
❖ 101.31% lower than Restaurants
industry
Source: Simply Wall Street - DPZ

25. Domino’s Beta Needs to be Levered Due to Great
Amount of Debt
❖ Bottom - up beta
Source: Simply Wall Street - DPZ

26. High Cost of Equity Representing High Risk
❖ Cost of Equity = Risk Free Rate + ( Levered Beta * Equity Risk Premium)
= 1.74% + (1.115 * 5.44%)
= 7.81%
Source: Simply Wall Street - DPZ

27. 4 out of 5 Risk Checks “PASS”
4
Source: Simply Wall Street - DPZ

28. WACC Indicates Risk
❖ Range of WACC: 5.8% - 7.0%
❖ Domino’s WACC as of 2/2/2020: 5.93%
➢ Return is negative
➢ Company is shedding value
Source: GuruFocus

29. Investment Returns
Section IV

30. Negative ROE
Value of Liabilities > Value of Assets
❖ Return on Equity: -12.92%
❖ Calculation:
➢ Net Income / Shareholder's Equity
➢ $0.38B / -$2.94B=-12.92%
Source: Domino's Pizza Inc Debt to Equity Ratio 2006-2019 | DPZ - Macrotrends

31. Year Levered FCF (USD, Millions) Present Value Discounted (@ 7.81%)
2020 432.81 401.65
2021 492.31 423.99
2022 568.2 454.11
2023 705 522.88
2024 742 510.71
2025 770.26 492 (Est @ 3.81%)
2026 794.81 471.13 (Est @ 3.19%)
2027 816.7 449.26 (Est @ 2.75%)
2028 836.7 427.13 (Est @ 2.45%)
2029 855.42 405.25 (Est @ 2.24%)
Present value of next 5
years cash flows =
$4,558M
Source: Simply Wall Street - DPZ

32. Good Performance Ratios
❖ Current Ratio: 1.44 (ranked higher than 70% of companies in restaurant
industry)
❖ Profit Margin: 10.79%
❖ Return on Asset: 36.52%
❖ Revenue Per Share: 86.7
❖ Price/Equity Ratio: 31.10 (2018)
Source: Yahoo DPZ-Dominos Pizza Inc

33. Shareholder Returns are Positive Relative to
Industry and/or Market
Source: Domino’s Investor Data at a Glance Presentation

34. Capital Structure
Section V

35. Debt and Equity Financing are Used
The company uses both
1. Debt Financing
2. Equity financing
Source: Domino’s Balance Sheet - 2019

36. DPZ Uses Debt to its Advantage
❖ Domino’s has used debt financing to undergo major recapitalization in 1998,
2007, 2012, and 2019
Source: Yahoo Finance - Statistics
❖ The company often uses debt financing and has a current total debt of:
3.68B (mrq)

37. DPZ Uses Debt to its Advantage Pt. 2
Source: January 2020 Investor Presentation -

38. Growth in Sales Allows Domino’s to Pay its
High Debt
Source: Does Domino’s Have a Debt Problem?

39. Dividend Policy
Section VI
❖ Dividend Level
❖ Dividend Form
❖ Dividend Focus
❖ Dividend Comparison
❖ Dividend Policy

40. Dividend Level

41. Healthy Dividend Returns for
Shareholders - 2019
❖ Dividend yield = annual dividend per share/stock's price per share.
➢ = 2.6/281.75 = .92%
Source: Dividends.com and DPZ Quarterly Cash Flow Statement 2019

42. Fluctuating Dividend Yield (2016 - Present)
Source: YCharts

43. Declining but Healthy Payout Ratio Over the Past
5 Years
Source: YCharts
❖ Payout ratio = dividends per share/ earnings per share
➢ = .65/2.05 = 32% (2019 third quarter)

44. Dividend Form

45. 3 Forms in Which DPZ Pays Dividends
1. Cash Dividends
2. Special Dividends
3. Share Buyback
Source: DPZ Quarterly Cash Flow Statement 2019

46. Stock Price Saw no Reduction on Ex-Dividend Date
The company’s Board of Directors
declared a $0.65 per share quarterly
dividend
❖ Declaration Date: 10/04/2019
❖ Ex - Dividend Date: 12/12/19
❖ Payment Date: 12/27/19
The stock price did not go down on the ex-
dividend date. It could be because:
❖ The market was particularly optimistic about
the stock leading up to the ex-dividend date
❖ The dividend was so small, the reduction went
unnoticed
Source: DPZ Quarterly Cash Flow Statement 2019 and Dividends.com

47. Special Dividends in 2007 and 2012
March 16, 2012
❖ Special dividend = $3.00 per share
April 17, 2007
❖ Special dividend = $13.50 per share
➢ Was funded by a $1.85 billion new borrowing program at the time.
Source: YCharts

48. Significant Share Buyback
From the investor perspective:
❖ When there are fewer shares to go around, that can trigger a rise in prices
❖ Additionally, the shareholder’s overall ownership stake in the company
increases
Source: YCharts

49. Repurchasing Stock to Increase EPS
❖ On October 4, 2019, Domino’s Board of Directors authorized a new share
repurchase program to repurchase up to $1.0 billion of the company’s
common stock…….WHY?
❖ Reducing the total number of shares
➢ Often boosts earnings per share (EPS) of a company
➢ Inflate ROA and ROE
Source: Domino’s Investor Data at a Glance Presentation

50. Dividend Focus

51. Dividend Payments are Increasing
❖ Total dividend payments in the last 5 years = $9.4
❖ Average Dividends Per Share Growth Rate
➢ 1 year growth rate (TTM) = 18.18%
➢ 5 year growth rate (CAGR) = 21.06%
Year Dividends
2015 1.24
2016 1.52
2017 1.84
2018 2.2
2019 2.6
Source: Yahoo and Seeking Alpha

52. Dividend is Covered by Both Profit and Cash
Flow
❖ Domino’s Pizza paid out a comfortable 27% of its profit last year
❖ Its dividend payments took up just 28% of the free cash flow it generated,
which is a good payout ratio, meaning the company generated enough cash
to afford its dividend
Source: Simply Wall Street

53. Dividend Comparison

54. Inferior Dividend Yield Compared to Industry
❖ Domino’s Pizza dividend yield % is ranked lower than 72% of 199 companies
in the restaurant industry
Source: GuruFocus

55. Superior Payout Ratio Compared to Industry
❖ Payout Ratio Comparison
❖ Domino’s Pizza payout ratio is ranked higher than 73%
of the 162 companies in the restaurant industry
Source: GuruFocus

56. Domino’s Dividend Policy

57. FCFE > Dividends
Dividends:
FCFE
❖ Since FCFE > Dividends, the investors should be
expecting dividends
Source: Wall Street Journal

58. ROIC > WACC
2014 2015 2016 2017 2018
WACC 8.62 5.42 3.46 2.49 6.16
ROIC 77.62% 76.27% 58.85% 60.63% 64.18%
Source: Wall Street Journal
❖ Based on past years’ data we can trust the managers with the
cash as ROIC > WACC

59. DPZ Dividend Policy
Domino’s pays out
too little dividends
FCFE>Dividends
We trust the managers
with the cash based on
past project choice
ROIC > WACC
Firm has history of
good project choice
and good projects in
the future
Give managers the
flexibility to keep cash
and set dividends
Source: Mgmt 109 - Professor Richey’s slides

60. Valuation
SECTION VII

61. 2 Stage Free Cash Flow to Equity Model
❖ Terminal Value = FCF2029 × (1 + g) ÷ (Discount Rate – g)
= $855.417 x (1 + 1.74%) ÷ (7.81% - 1.74% ) = $14,345.25
❖ Present Value of Terminal Value = Terminal Value ÷ (1 + r)10
$14,565 ÷ (1 + 7.81%)10 = $6,764.65M
❖ Total Equity Value = Present value of next 10 years cash flows + Terminal
Value = $4,546 + $6,765 = $11,310.65
Source: Simply Wall Street - DPZ

62. Intrinsic Value < Market Value
❖ Equity Value per Share (USD)
= Total Value / Shares Outstanding
= $11,311 / 41 = $276.54
❖ Current discount:
Discount to share price of $291.60 = -1 x ($291.60 - $276.54) / $276.54
= -5.4%
Source: Simply Wall Street - DPZ

63. DPZ is 5.4% Overvalued
Source: Simply Wall Street - DPZ

64. DCF and Relative Value are Consistent -
DPZ is Overvalued
Domino’s P/E ratio = NYSE:DPZ Share Price ÷ EPS (both in USD)
291.6 ÷ 9.35 = 31.18x
Source: Simply Wall Street - DPZ

65. High P/E Ratio
Source: Simply Wall Street - DPZ

66. DPZ is Overvalued
❖ A stock may become overvalued in one of two ways.
➢ First, a stock may be overvalued due to a surge in demand driven primarily by investor
perceptions. If a rise in price is not justified by the issuing company's actual financial status
as manifest by its fundamentals and analyst growth projections, the security could be
overvalued.
➢ The second way by which a stock may become overvalued is if its fundamentals (i.e. revenue,
earnings, growth projections, balance sheet, etc.) decline while its market price remains
constant. If the security was already fairly valued and does drop in price when the
fundamentals deteriorate, then the security is likely valued adequately.
Source: Simply Wall Street - DPZ

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74. Thank you!