Why It Might Not Make Sense To Buy Pizza Pizza Royalty Corp. (TSE:PZA) For Its Upcoming Dividend

By
Simply Wall St
Published
April 25, 2021
TSX:PZA
Source: Shutterstock

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Pizza Pizza Royalty Corp. (TSE:PZA) is about to go ex-dividend in just 2 days. Investors can purchase shares before the 29th of April in order to be eligible for this dividend, which will be paid on the 14th of May.

Pizza Pizza Royalty's next dividend payment will be CA$0.055 per share, on the back of last year when the company paid a total of CA$0.67 to shareholders. Calculating the last year's worth of payments shows that Pizza Pizza Royalty has a trailing yield of 5.9% on the current share price of CA$10.6. If you buy this business for its dividend, you should have an idea of whether Pizza Pizza Royalty's dividend is reliable and sustainable. As a result, readers should always check whether Pizza Pizza Royalty has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Pizza Pizza Royalty

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Its dividend payout ratio is 89% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. It could become a concern if earnings started to decline. 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. It paid out 93% 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.

While Pizza Pizza Royalty's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Pizza Pizza Royalty's ability to maintain its 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 April 26th 2021

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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're not enthused to see that Pizza Pizza Royalty's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

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 3.9% per year on average over the past 10 years, which is uninspiring.

To Sum It Up

Is Pizza Pizza Royalty an attractive dividend stock, or better left on the shelf? It's not great to see earnings per share have been flat and that the company paid out an uncomfortably high percentage of its cash flow over the past year. Cash flows are typically more volatile than earnings, but this is still not what we like to see. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Pizza Pizza Royalty.

With that in mind though, if the poor dividend characteristics of Pizza Pizza Royalty don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 1 warning sign for Pizza Pizza Royalty that we recommend you consider before investing in the business.

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.

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