Dunkin' Brands: Asset Light Business With Strong Dividends

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Apr 29, 2015

Dunkin' Brands (DNKY, Financial), which operates quick service restaurants under the Dunkin Donuts and Baskin-Robbins brands worldwide, is a good portfolio stock with an asset light operating model and robust dividends. This article discusses the key positives related to the stock that make it worth considering for the long-term portfolio.

Dunkin' Brands has more than 18,000 restaurants worldwide, but operates on an asset light model. The company has a nearly 100% franchise business mode and this is the first positive point to consider while considering exposure to the stock. There are several advantages of the asset light model for Dunkin' Brands. First, the company has minimal capital expenditure and this helps the company increase its cash flow allocation towards dividends and share repurchase. Second, the company has a healthy operating margin with 1Q15 operating margin at 45% as compared to an operating margin of 40.2% for 1Q14.

From a dividend perspective, Dunkin' Brands announced a quarterly dividend of $0.265 per share and this translates into an annual dividend of $1.06. At a current stock price of $52.65, the dividend yield comes to 2.2%. In my view, the company’s dividend payout is likely to increase in the coming years.

The reason for believing that strong growth will continue for Dunkin' Brands is the company’s focus on emerging markets. On January 8, the company entered into a long-term master franchise agreement with Golden Cup Pte. The franchisee plans to open and operate more than 1,400 Dunkin' Donuts restaurants across China over the next 20 years. Therefore, there are big growth plans on an asset light model in emerging markets and that is likely to drive strong sales and EPS growth.

In addition to value creation through dividends and through capital appreciation (backed by revenue and EPS growth), Dunkin' Brands authorized a new program to repurchase up to an aggregate of $700 million of its outstanding common stock over the next two years. Therefore, the company’s EPS will get a boost also through the share repurchase.

For FY15, Dunkin' Brands expects comparable restaurant sales growth of 1% to 3% with 615 to 700 new restaurants likely during the year. The growth trajectory in terms of new restaurant opening is therefore robust and should translate into good growth in the coming quarters.

From a balance sheet perspective, Dunkin' Brands has good financial flexibility with debt at around $2.5 billion and an annual interest payment of $96 million. With strong operating margin and minimal capital expenditure, debt servicing is not a major concern.

From a forward EPS perspective, Dunkin' Brands expects an adjusted EPS of $1.87 to $1.91 per share for FY15. Considering an EPS of $1.88, the forward PE comes to 28 for FY15. In my view, this is not expensive for a company that is targeting 15%+ EPS growth in the long-term.

In conclusion, Dunkin' Brands remains an attractive investment and the company’s focus on emerging markets is likely to translate into the desired revenue and EPS growth. Further, the company’s dividend is likely to increase in the coming years along with further share repurchase. Therefore, there will be multiple value creation opportunities in the coming quarters and years.