The 1 Number That Sets Dunkin Brands Group Inc (DNKN) Apart

What makes Dunkin completely different is their margins. Dunkin’s competition have operating margins of 14.5% at Panera, 14.5% at Green Mountain, and 16.6% at Starbucks. By comparison, Dunkin’s operating margin in the current quarter was 41.90%. This makes a huge difference in Dunkin’s ability to generate free cash flow from their sales.

It’s All About The Cash
Dunkin’s higher operating cash flow leads to significant free cash flow generation even though sales growth might not be that impressive. The reason is, Dunkin Brands is nearly 100% franchised. This means the company can expand quickly on its franchisees money instead of using its own. The fact that the company retired nearly 11% of their diluted shares in just the last year is proof of the power behind Dunkin’s cash flow. While Dunkin was busy retiring shares, they also have been paying a dividend, and they just announced a 27% increase in the payout. Though the company’s free cash flow payout is 61.77%, the free cash flow generated from new franchisees should allow the company to expand this payout in the future.

The difference in cash flow quality is what makes Dunkin’s stock misunderstood. On the surface, shares might seem expensive at about 24 times projected 2013 earnings. Since Starbucks trades for 26 times earnings, and Panera trades for 23 times earnings, some investors might assume they are better values. However, Dunkin pays a dividend where Panera does not, and Dunkin pays a better yield than Starbucks.

While it would be easy to make a case that Green Mountain is a better value at 16 times earnings, with a near 19% expected growth rate, Dunkin has a longer-term and less disrupt-able franchise. Green Mountain must rely on innovation and constantly stay on the offensive to fend off competitors. Long story short, Dunkin has a unique business model. If the company continues to deliver significant cash to shareholders through dividends and share repurchases, long-term investors should be happy with the results.

The article The 1 Number That Sets This Company Apart originally appeared on Fool.com and is written by Chad Henage.

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