Pizza Pizza Royalty Corp.'s (TSE:PZA) dividend will be increasing to CA$0.06 on 15th of October. This takes the dividend yield from 5.3% to 5.8%, which shareholders will be pleased with.
Pizza Pizza Royalty's Earnings Easily Cover the Distributions
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, Pizza Pizza Royalty was paying out 89% of earnings and more than 75% of free cash flows. This is usually an indication that the focus of the company is returning cash to shareholders rather than reinvesting it for growth.
EPS is set to fall by 3.6% over the next 12 months if recent trends continue. However, if the dividend continues along recent trends, we estimate the payout ratio could reach 95%, meaning that most of the company's earnings is being paid out to shareholders.
The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. The first annual payment during the last 10 years was CA$0.93 in 2011, and the most recent fiscal year payment was CA$0.60. Doing the maths, this is a decline of about 4.2% per year. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
Pizza Pizza Royalty May Find It Hard To Grow The Dividend
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Over the past five years, it looks as though Pizza Pizza Royalty's EPS has declined at around 3.6% a year. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.
Pizza Pizza Royalty's Dividend Doesn't Look Sustainable
Overall, we always like to see the dividend being raised, but we don't think Pizza Pizza Royalty will make a great income stock. The track record isn't great, and the payments are a bit high to be considered sustainable. We don't think Pizza Pizza Royalty is a great stock to add to your portfolio if income is your focus.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come across 2 warning signs for Pizza Pizza Royalty you should be aware of, and 1 of them can't be ignored. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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