Could Boston Pizza Royalties Income Fund (TSE:BPF.UN) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
A high yield and a long history of paying dividends is an appealing combination for Boston Pizza Royalties Income Fund. We'd guess that plenty of investors have purchased it for the income. The company also returned around 1.2% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple analysis can reduce the risk of holding Boston Pizza Royalties Income Fund for its dividend, and we'll focus on the most important aspects below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Boston Pizza Royalties Income Fund paid out 105% of its profit as dividends, over the trailing twelve month period. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Of the free cash flow it generated last year, Boston Pizza Royalties Income Fund paid out 49% as dividends, suggesting the dividend is affordable. It's good to see that while Boston Pizza Royalties Income Fund's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Remember, you can always get a snapshot of Boston Pizza Royalties Income Fund's latest financial position, by checking our visualisation of its financial health.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Boston Pizza Royalties Income Fund has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was CA$1.4 in 2011, compared to CA$0.8 last year. The dividend has shrunk at around 5.5% a year during that period. Boston Pizza Royalties Income Fund's dividend has been cut sharply at least once, so it hasn't fallen by 5.5% every year, but this is a decent approximation of the long term change.
When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Over the past five years, it looks as though Boston Pizza Royalties Income Fund's EPS have declined at around 15% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Boston Pizza Royalties Income Fund's earnings per share, which support the dividend, have been anything but stable.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're not keen on the fact that Boston Pizza Royalties Income Fund paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share are down, and Boston Pizza Royalties Income Fund's dividend has been cut at least once in the past, which is disappointing. In summary, Boston Pizza Royalties Income Fund has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 4 warning signs for Boston Pizza Royalties Income Fund (of which 1 doesn't sit too well with us!) you should know about.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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