It's Time to Dip Into Dunkin'

08/21/2019 5:00 am EST

Focus: CONSUMER

John Staszak

Securities Analyst: Consumer Discretionary & Consumer Staples, Argus Research Corporation

Dunkin’ Brands Group (DNKN) is among the top franchisors of quick-service restaurants serving coffee, baked goods and ice cream, notes John Staszak, an analyst with the leading independent research firm Argus Research.

Dunkin’ Brands franchises restaurants under its Dunkin’ Donuts and Baskin-Robbins brand names and has approximately 18,900 locations in 57 countries.

The company generates about 78% of its revenue from the U.S., and is organized into four segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International.

We expect higher comps and accelerated store openings at Dunkin’ Donuts U.S. to be driven by a range of factors, including drive-thru lines dedicated to mobile orders, brighter interior designs, espresso machines, digital order boards, and a tap system serving coffee, iced tea and cold brew.

We believe that these initiatives will enable the company to deliver 2%-3% growth in comp sales, 5% growth in revenue, and high single-digit earnings growth in the near term.

Over the long term, we remain optimistic about Dunkin’s strong franchise program, established brands, and opportunities to expand into new sales channels and geographic regions.

In March 2019, Dunkin’ raised its quarterly dividend by 8% to $0.375 per share, or $1.50 annually, for a yield of about 2.0%. We expect the company’s strong free cash flow (franchisees pay for stores and the company collects 5% of sales) to support further dividend hikes. Our dividend estimates are $1.50 for 2019 and $1.80 for 2020.

The consumer discretionary sector has shown solid market momentum, reflecting investor expectations for strong durable goods demand in the wake of tax cuts. At the same time, consumer discretionary stocks have been out of favor for multiple quarters, and appear undervalued relative to peers.

We are raising our rating on Dunkin’ Brands Group from "hold" to "buy" and setting a price target of $92. Our five-year rating remains "buy".

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