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It looks like Pizza Pizza Royalty Corp. (TSE:PZA) is about to go ex-dividend in the next 3 days. This means that investors who purchase shares on or after the 27th of November will not receive the dividend, which will be paid on the 15th of December.
Pizza Pizza Royalty's next dividend payment will be CA$0.055 per share. Last year, in total, the company distributed CA$0.60 to shareholders. Calculating the last year's worth of payments shows that Pizza Pizza Royalty has a trailing yield of 7.3% on the current share price of CA$9.1. If you buy this business for its dividend, you should have an idea of whether Pizza Pizza Royalty's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
View 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. Last year Pizza Pizza Royalty paid out 91% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. It paid out 96% 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 payments were not well covered by either earnings or cash flow, we are 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.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're not enthused to see that Pizza Pizza Royalty's earnings per share have remained effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.