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

Pizza Pizza Royalty Corp. (TSE:PZA) stock is about to trade ex-dividend in 3 days. This means that investors who purchase shares on or after the 29th of October will not receive the dividend, which will be paid on the 13th of November.

Pizza Pizza Royalty's upcoming dividend is CA$0.05 a share, following on from the last 12 months, when the company distributed a total of CA$0.60 per share to shareholders. Looking at the last 12 months of distributions, Pizza Pizza Royalty has a trailing yield of approximately 7.0% on its current stock price of CA$8.6. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Pizza Pizza Royalty

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Pizza Pizza Royalty paid out 96% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 102% 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.

Cash is slightly more important than profit from a dividend perspective, but given Pizza Pizza Royalty's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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

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Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about Pizza Pizza Royalty's flat earnings 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Pizza Pizza Royalty's dividend payments per share have declined at 4.3% per year on average over the past 10 years, which is uninspiring.

Final Takeaway

Is Pizza Pizza Royalty worth buying for its dividend? It's been unable to generate earnings growth, yet is paying out an uncomfortably high percentage of both its profits (96%) and cash flow (102%) as dividends. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in Pizza Pizza Royalty despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. In terms of investment risks, we've identified 1 warning sign with Pizza Pizza Royalty and understanding them should be part of your investment process.

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.

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