3 Reasons Why Domino's Pizza Stock Could Be a Great Buy for Investors Who Think Like Warren Buffett

On any given morning in Omaha, Nebraska, one can expect to find Warren Buffett buying breakfast at the local McDonald's. The billionaire investor loves to stop by the hamburger chain on his way to the office to run his trillion-dollar empire Berkshire Hathaway. But when it comes to Berkshire's latest investment, it's not buying Buffett's beloved burgers. Rather, it's buying shares of Domino's Pizza (NYSE: DPZ).

On Nov. 14, Berkshire Hathaway disclosed that it had purchased nearly 1.3 million shares of Domino's Pizza. But investors can't say with certainty that the decision to buy the pizza stock came from Warren Buffett himself. At 94 years old, he's started entrusting more investment decisions to certain people around him.

That said, what Buffett looks for in an investment is well known, and those in his inner circle think about investing much as he does. Therefore, whether it was directly his choice or the decision came from someone else, investors can have confidence that Domino's Pizza stock checks some important boxes for Buffett.

Here are three things about Domino's Pizza stock that I believe could appeal to Buffett. And these things are why it could be a great stock to buy for those who approach investing as he does.

1. The dominant pizza player is simple to understand

"Never invest in a business you cannot understand." -- Warren Buffett

If you're going to be an investor, you need to be a business analyst. But businesses can be complex, and Buffett is the first to admit that he doesn't understand everything out there. That's why he says he only invests in businesses that are inside of his "circle of competence."

Restaurant stocks are among the easiest businesses to understand.

With over 21,000 locations worldwide, Domino's is the largest pizza business in the world. But it doesn't operate the majority of its restaurants. Rather, restaurants are primarily run by franchisees. This adds to the simplicity of the business.

The main objectives for Domino's, therefore, is to keep its food on consumers' minds and to keep its franchisees profitable. The risks associated with running the day-to-day operations are handled by the third-party franchisees. It's not necessarily complicated, but some companies do this better than others. And Domino's undeniably has excelled over the past decade.

2. Domino's has a competitive advantage

"A truly great business must have an enduring moat." -- Warren Buffett

Investors know that Domino's is in the pizza business. But few are aware that the company generates most of its revenue from supply chain services. For context, in its fiscal third quarter of 2024, it had over $650 million in supply chain revenue, which was 60% of its total revenue.

With its supply chain, Domino's delivers pizza dough, ingredients, and even food prep equipment. And the sheer size of its supply chain allows the company to enjoy efficiencies of scale. Its franchisees aren't required to use its services. But they're incentivized through profit-sharing agreements, leading to strong adoption levels.

In short, Domino's offers its franchisees a compelling service here. This can improve satisfaction, helping to keep restaurants open and even lead them to open new locations. In my opinion, it's an under-the-radar competitive advantage, otherwise known as a moat.

Companies with competitive advantages often enjoy profit margins that are superior to that of rivals. And in this case, Domino's indeed has an operating margin that's consistently better than top rival Papa John's, as the chart below shows.

DPZ Operating Margin (TTM) data by YCharts

3. It gives back to shareholders

Yes, Domino's is a huge and easy-to-understand business. And it's in a strong competitive position that allows for strong profitability. But Buffett also cares about finding companies that give cash back to shareholders.

Domino's pays a growing dividend, which Buffett certainly appreciates. But it also regularly repurchases shares. And as Buffett wrote in his 2022 letter to shareholders, "The math isn't complicated: When the share count goes down, your interest in our many businesses goes up."

DPZ Dividend data by YCharts

Domino's Pizza is in an excellent position to create long-term shareholder value from here for the three reasons I've highlighted. Granted, there are other important investment factors that should be considered, including valuation and other metrics. But for now, suffice it to say that Domino's is the kind of business that investors should be looking for. And I'm not surprised that Berkshire Hathaway felt like it belonged in its stock portfolio.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Domino's Pizza. The Motley Fool has a disclosure policy.