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It Might Not Be A Great Idea To Buy Pizza Pizza Royalty Corp. (TSE:PZA) For Its Next Dividend

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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Pizza Pizza Royalty Corp. (TSE:PZA) is about to trade ex-dividend in the next 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Pizza Pizza Royalty's shares on or after the 30th of August will not receive the dividend, which will be paid on the 15th of September.

The company's next dividend payment will be CA$0.06 per share, and in the last 12 months, the company paid a total of CA$0.64 per share. Based on the last year's worth of payments, Pizza Pizza Royalty stock has a trailing yield of around 5.6% on the current share price of CA$11.5. 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! So we need to investigate whether Pizza Pizza Royalty can afford its dividend, and if the dividend could grow.

See 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. Its dividend payout ratio is 89% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. 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 90% 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. Were this to happen repeatedly, this would be a risk to Pizza Pizza Royalty's ability to maintain its dividend.

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

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Pizza Pizza Royalty's earnings per share have been shrinking at 2.7% a year over the previous five years.

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 3.6% 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.

Final Takeaway

Is Pizza Pizza Royalty worth buying for its dividend? Pizza Pizza Royalty had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. Bottom line: Pizza Pizza Royalty has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Pizza Pizza Royalty. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.