One Tweak Dunkin’ Brands Should Really Consider in 2019

Originally published by The Motley Fool.

Dunkin’ Brands Group (NASDAQ:DNKN) has entered 2019 in reasonably good shape, as the company’s shares managed to finish flat last year, avoiding the share price losses of many of its publicly traded competitors. Prospects are generally bright for the doughnut and beverage giant, as management expects current-year sales to be enhanced by a 2018 year-end upgrade of the company’s coffee offerings.

But what’s a new year in the equities markets without a little armchair criticism from detached observers? If I could choose one item to harp on in 2019 — and I suppose I just did — it would be Dunkin’ Brands’ capital structure, which is weighted too heavily toward debt for my liking.

Leverage galore on the balance sheet

Image Source: Dunkin' Brands

Image Source: Dunkin’ Brands

Those who hold shares of DNKN are probably already aware that the Dunkin’ financial model allows for copious amounts of debt on its balance sheet. Since going public in 2011, the company has used regular debt offerings to raise cash, which is then returned to shareholders via share repurchases.

These repurchases typically occur when Dunkin’ refinances its debt. Management tends to utilize borrowing power created by increased earnings to offer new debt in excess of required refinancing levels.

This was the case in the company’s latest major refinancing in November 2017. Dunkin’ issued $1.4 billion of senior fixed-rate notes and used part of the proceeds to retire $731.3 million in older notes, while returning $650 million to investors in February 2018 via share repurchases.

This debt-financed share repurchase activity fits within the Dunkin’ corporate philosophy and business model. Dunkin’ Brands operates as a nearly 100% franchised operation — it runs very few of its own locations.

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