Don't Buy Boston Pizza Royalties Income Fund (TSE:BPF.UN) For Its Next Dividend Without Doing These Checks

By
Simply Wall St
Published
May 15, 2021
TSX:BPF.UN
Source: Shutterstock

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Boston Pizza Royalties Income Fund (TSE:BPF.UN) is about to trade ex-dividend in the next 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase Boston Pizza Royalties Income Fund's shares before the 20th of May in order to receive the dividend, which the company will pay on the 31st of May.

The company's next dividend payment will be CA$0.065 per share, and in the last 12 months, the company paid a total of CA$0.78 per share. Last year's total dividend payments show that Boston Pizza Royalties Income Fund has a trailing yield of 5.9% on the current share price of CA$13.33. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Boston Pizza Royalties Income Fund has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Boston Pizza Royalties Income Fund

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Boston Pizza Royalties Income Fund paid out 105% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 49% of its free cash flow in the past year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Boston Pizza Royalties Income Fund fortunately did generate enough cash to fund its dividend. 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.

Click here to see how much of its profit Boston Pizza Royalties Income Fund paid out over the last 12 months.

historic-dividend
TSX:BPF.UN Historic Dividend May 16th 2021

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Boston Pizza Royalties Income Fund's earnings per share have dropped 15% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Boston Pizza Royalties Income Fund has seen its dividend decline 5.5% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

Is Boston Pizza Royalties Income Fund an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 105% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Boston Pizza Royalties Income Fund's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

So if you're still interested in Boston Pizza Royalties Income Fund despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Be aware that Boston Pizza Royalties Income Fund is showing 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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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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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.