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Pizza Pizza Royalty Corp.'s (TSE:PZA) dividend will be increasing to CA$0.06 on 15th of November. This will take the annual payment from 5.7% to 5.8% of the stock price, which is above what most companies in the industry pay.
Pizza Pizza Royalty Doesn't Earn Enough To Cover Its Payments
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before making this announcement, Pizza Pizza Royalty's was paying out quite a large proportion of earnings and 89% of free cash flows. This is usually an indication that the focus of the company is returning cash to shareholders rather than reinvesting it for growth.
If the company can't turn things around, EPS could fall by 3.6% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 96%, which could put the dividend under pressure if earnings don't start to improve.
Pizza Pizza Royalty's Track Record Isn't Great
The dividend is currently lower than it was 10 years ago, indicating that there has been a downward trend over that time. Since 2011, the dividend has gone from CA$0.93 to CA$0.67. Doing the maths, this is a decline of about 3.3% per year. A company that decreases its dividend over time generally isn't what we are looking for.
Pizza Pizza Royalty May Find It Hard To Grow The Dividend
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's not great to see that Pizza Pizza Royalty's earnings per share has fallen at approximately 3.6% per year over the past five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed.
Our Thoughts On Pizza Pizza Royalty's Dividend
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. This company is not in the top tier of income providing stocks.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 1 warning sign for Pizza Pizza Royalty that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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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