It Might Not Be A Great Idea To Buy Papa John's International, Inc. (NASDAQ:PZZA) For Its Next Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Papa John's International, Inc. (NASDAQ:PZZA) is about to trade ex-dividend in the next 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase Papa John's International's shares before the 12th of August in order to receive the dividend, which the company will pay on the 26th of August.
The company's next dividend payment will be US$0.42 per share. Last year, in total, the company distributed US$1.40 to shareholders. Based on the last year's worth of payments, Papa John's International stock has a trailing yield of around 1.5% on the current share price of $91.95. If you buy this business for its dividend, you should have an idea of whether Papa John's International's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Check out our latest analysis for Papa John's International
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Papa John's International paid out more than half (56%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year, it paid out dividends equivalent to 207% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since Papa John's International is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
Papa John's International paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Papa John's International to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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 Papa John's International'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. Papa John's International has delivered an average of 12% per year annual increase in its dividend, based on the past nine years of dividend payments.
To Sum It Up
Is Papa John's International an attractive dividend stock, or better left on the shelf? Earnings per share have not grown and Papa John's International's profit payout ratio looks reasonable. However, it paid out a disconcertingly high percentage of its cashflow, which is a worry. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
Although, if you're still interested in Papa John's International and want to know more, you'll find it very useful to know what risks this stock faces. We've identified 3 warning signs with Papa John's International (at least 2 which are concerning), and understanding them should be part of your investment process.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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