Pizza Pizza Royalty Corp. (TSE:PZA) stock is about to trade ex-dividend in 4 days. If you purchase the stock on or after the 30th of July, you won't be eligible to receive this dividend, when it is paid on the 14th of August.
Pizza Pizza Royalty's next dividend payment will be CA$0.05 per share. Last year, in total, the company distributed CA$0.86 to shareholders. Last year's total dividend payments show that Pizza Pizza Royalty has a trailing yield of 7.1% on the current share price of CA$8.41. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. 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.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, Pizza Pizza Royalty paid out 102% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. The company paid out 101% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.
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.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Pizza Pizza Royalty's flat earnings 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. Minimal earnings growth, combined with concerningly high payout ratios suggests that Pizza Pizza Royalty is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Pizza Pizza Royalty has seen its dividend decline 4.3% per annum on average over the past 10 years, which is not great to see.
The Bottom Line
Is Pizza Pizza Royalty worth buying for its dividend? Earnings per share are effectively flat, plus Pizza Pizza Royalty's dividend is not well covered by either earnings or cash flow, which is not great. 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. Our analysis shows 1 warning sign for Pizza Pizza Royalty and you should be aware of it before buying any shares.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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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