Dividend Investors: Don't Be Too Quick To Buy Pizza Pizza Royalty Corp. (TSE:PZA) For Its Upcoming Dividend

By
Simply Wall St
Published
November 24, 2021
TSX:PZA
Source: Shutterstock

Readers hoping to buy Pizza Pizza Royalty Corp. (TSE:PZA) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Pizza Pizza Royalty's shares on or after the 29th of November will not receive the dividend, which will be paid on the 15th of December.

The company's next dividend payment will be CA$0.06 per share. Last year, in total, the company distributed CA$0.67 to shareholders. Based on the last year's worth of payments, Pizza Pizza Royalty stock has a trailing yield of around 5.6% on the current share price of CA$12.13. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

See 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 92% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Pizza Pizza Royalty generated enough free cash flow to afford its dividend. The company paid out 95% of its free cash flow over the last year, which we think is outside the ideal range 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.

Cash is slightly more important than profit from a dividend perspective, but given Pizza Pizza Royalty's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

historic-dividend
TSX:PZA Historic Dividend November 24th 2021

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. So we're not too excited that Pizza Pizza Royalty's earnings are down 2.5% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Pizza Pizza Royalty's dividend payments per share have declined at 3.1% per year on average over the past 10 years, which is uninspiring. 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.

Final Takeaway

From a dividend perspective, should investors buy or avoid Pizza Pizza Royalty? Not only are earnings per share declining, but Pizza Pizza Royalty is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. 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 that we strongly recommend you have a look at before investing in the company.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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Simply Wall St

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.