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Don't Race Out To Buy Pizza Pizza Royalty Corp. (TSE:PZA) Just Because It's Going Ex-Dividend

Simply Wall St

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 4 days. Ex-dividend means that investors that purchase the stock on or after the 30th of January will not receive this dividend, which will be paid on the 14th of February.

Pizza Pizza Royalty's next dividend payment will be CA$0.071 per share. Last year, in total, the company distributed CA$0.86 to shareholders. Looking at the last 12 months of distributions, Pizza Pizza Royalty has a trailing yield of approximately 8.4% on its current stock price of CA$10.14. 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! 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.

Check out 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. Last year Pizza Pizza Royalty paid out 101% of its profits as dividends to shareholders, suggesting the dividend is not well covered by 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 103% of its free cash flow in the form of dividends last year, which is outside the comfort zone 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.

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

TSX:PZA Historical Dividend Yield, January 25th 2020

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 fall far enough, the company could be forced to cut its dividend. 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. With limited earnings growth and paying out a concerningly high percentage of its earnings, the prospects of future dividend growth don't look so bright here.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Pizza Pizza Royalty has seen its dividend decline 0.8% per annum on average over the past ten years, which is not great to see.

The Bottom Line

Has Pizza Pizza Royalty got what it takes to maintain its dividend payments? 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. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Curious about whether Pizza Pizza Royalty has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.