Dividend Investors: Don't Be Too Quick To Buy Pizza Pizza Royalty Corp. (TSE:PZA) For Its Upcoming Dividend
Pizza Pizza Royalty Corp. (TSE:PZA) stock is about to trade ex-dividend in two days. Investors can purchase shares before the 30th of March in order to be eligible for this dividend, which will be paid on the 15th of April.
Pizza Pizza Royalty's next dividend payment will be CA$0.055 per share, and in the last 12 months, the company paid a total of CA$0.67 per share. Looking at the last 12 months of distributions, Pizza Pizza Royalty has a trailing yield of approximately 5.6% on its current stock price of CA$10.49. 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! We need to see whether the dividend is covered by earnings and if it's growing.
View our latest analysis for Pizza Pizza Royalty
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. It paid out 89% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. 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. 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. Cash is king, as they say, and were Pizza Pizza Royalty to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Click here to see how much of its profit Pizza Pizza Royalty paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. 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. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all 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 4.5% per year on average over the past 10 years, which is uninspiring.
Final Takeaway
Has Pizza Pizza Royalty got what it takes to maintain its dividend payments? 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.
Although, if you're still interested in Pizza Pizza Royalty and want to know more, you'll find it very useful to know what risks this stock faces. 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.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
