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Why It Might Not Make Sense To Buy Papa John's International, Inc. (NASDAQ:PZZA) For Its Upcoming Dividend

·4 min read

Papa John's International, Inc. (NASDAQ:PZZA) stock is about to trade ex-dividend in 3 days. This means that investors who purchase shares on or after the 9th of November will not receive the dividend, which will be paid on the 20th of November.

Papa John's International's next dividend payment will be US$0.23 per share. Last year, in total, the company distributed US$0.90 to shareholders. Looking at the last 12 months of distributions, Papa John's International has a trailing yield of approximately 1.2% on its current stock price of $76.11. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Papa John's International has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Papa John's International

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Papa John's International paid out 235% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. 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. Fortunately, it paid out only 48% of its free cash flow in the past year.

It's good to see that while Papa John's International's dividends were not covered by profits, at least they are affordable from a cash perspective. 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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Papa John's International's 26% per annum decline in earnings in 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. Since the start of our data, seven years ago, Papa John's International has lifted its dividend by approximately 8.8% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Papa John's International is already paying out 235% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is Papa John's International an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 235% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Papa John's International's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of Papa John's International don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 4 warning signs for Papa John's International and you should be aware of these before buying any shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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.

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