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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 Boston Pizza Royalties Income Fund (TSE:BPF.UN) is about to go ex-dividend in just three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Boston Pizza Royalties Income Fund's shares on or after the 20th of May will not receive the dividend, which will be paid on the 31st of May.
The company's next dividend payment will be CA$0.065 per share, and in the last 12 months, the company paid a total of CA$0.78 per share. Looking at the last 12 months of distributions, Boston Pizza Royalties Income Fund has a trailing yield of approximately 5.9% on its current stock price of CA$13.33. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
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. Boston Pizza Royalties Income Fund paid out 105% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. Fortunately, it paid out only 49% of its free cash flow in the past year.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Boston Pizza Royalties Income Fund fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Boston Pizza Royalties Income Fund's earnings per share have dropped 15% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Boston Pizza Royalties Income Fund's dividend payments per share have declined at 5.5% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.
The Bottom Line
Should investors buy Boston Pizza Royalties Income Fund for the upcoming dividend? It's not a great combination to see a company with earnings in decline and paying out 105% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Boston Pizza Royalties Income Fund.
Although, if you're still interested in Boston Pizza Royalties Income Fund and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 4 warning signs for Boston Pizza Royalties Income Fund (1 makes us a bit uncomfortable) you should be aware of.
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.
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