Don't Race Out To Buy Pizza Pizza Royalty Corp. (TSE:PZA) Just Because It's Going Ex-Dividend

It looks like Pizza Pizza Royalty Corp. (TSE:PZA) is about to go ex-dividend in the next 3 days. You can purchase shares before the 29th of April in order to receive the dividend, which the company will pay on the 15th of May.

Pizza Pizza Royalty's upcoming dividend is CA$0.05 a share, following on from the last 12 months, when the company distributed a total of CA$0.86 per share to shareholders. Calculating the last year's worth of payments shows that Pizza Pizza Royalty has a trailing yield of 7.3% on the current share price of CA$8.22. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Pizza Pizza Royalty

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Pizza Pizza Royalty paid out 100% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 102% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

As Pizza Pizza Royalty's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see how much of its profit Pizza Pizza Royalty paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that Pizza Pizza Royalty's earnings are effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. With limited earnings growth and paying out a concerningly high percentage of its earnings, the prospects of future dividend growth don't look so bright here.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Pizza Pizza Royalty's dividend payments per share have declined at 4.3% per year on average over the past ten years, which is uninspiring.

The Bottom Line

From a dividend perspective, should investors buy or avoid Pizza Pizza Royalty? Pizza Pizza Royalty is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, at the same time as its earnings per share are struggling to grow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering Pizza Pizza Royalty as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 2 warning signs for Pizza Pizza Royalty and you should be aware of them before buying any shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.