Pizza Pizza Royalty Corp.'s (TSE:PZA) investors are due to receive a payment of CA$0.06 per share on 15th of February. Based on this payment, the dividend yield on the company's stock will be 5.9%, which is an attractive boost to shareholder returns.
Pizza Pizza Royalty Doesn't Earn Enough To Cover Its Payments
A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, Pizza Pizza Royalty's was paying out quite a large proportion of earnings and 92% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but it is still in a reasonable range to continue with.
EPS is set to fall by 3.6% over the next 12 months if recent trends continue. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 97%, which could put the dividend under pressure if earnings don't start to improve.
Pizza Pizza Royalty Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from CA$0.70 in 2012 to the most recent annual payment of CA$0.69. Payments have been decreasing at a very slow pace in this time period. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
The Dividend's Growth Prospects Are Limited
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. However, initial appearances might be deceiving. In the last five years, Pizza Pizza Royalty's earnings per share has shrunk at approximately 3.6% per annum. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.
Our Thoughts On Pizza Pizza Royalty's Dividend
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Pizza Pizza Royalty's payments, as there could be some issues with sustaining them into the future. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. 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. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come across 2 warning signs for Pizza Pizza Royalty you should be aware of, and 1 of them makes us a bit uncomfortable. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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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.