The stock market offers investors tonnes of options that cater to different investor preferences. Some stocks are ideal for growth investors, and others, like restaurant royalty stocks, are made for dividend investors. For instance, Boston Pizza Royalties (TSX: BPF.UN) stock has a current dividend yield of approximately 8.1%, while Pizza Pizza Royalty (TSX: PZA) offers a yield of around 6.4%.
However, although these stocks may offer significant and attractive yields, restaurants could also face significant headwinds in the short term, especially if a major recession materializes before the end of the year.
So, it’s essential to ensure that these dividends are safe today and that these stocks have a margin of safety in case sales drop off.
While the pandemic was unprecedented and not necessarily comparable to a recession, the effect it had on many restaurant stocks goes to show that challenges in the economic environment can certainly impact their sales and income.
Luckily for investors, royalty stocks are some of the easiest stocks you can analyze due to their straightforward business models. So, let’s look at which stock is the better buy today: Boston Pizza or Pizza Pizza.
Is Boston Pizza’s 8.1% dividend safe?
Boston Pizza is an interesting stock to consider, because it’s the number one casual dining brand in Canada. While both Boston Pizza and Pizza Pizza are restaurants and both are primarily pizza places, Boston Pizza is a restaurant where most customers dine in compared to Pizza Pizza, which is more of a quick-service restaurant.
These are significant differences and could result in much different impacts on each business as the economic environment worsens.
Typically, due to the higher costs of Boston Pizza’s offerings, the restaurant stock will likely see a bigger hit to its sales as a result of a recession.
For example, at the start of the pandemic, Boston Pizza’s sales fell by over 50% in the first full quarter of the pandemic and over 30% in the first full year. In addition, it suspended its dividend entirely for the first six months of the pandemic, and when it was reinstated, its dividend was 36% lower than where it was before the pandemic.
Of course, these numbers were impacted by a slowdown in the economy but also largely due to the fact that there were lockdowns and restrictions on indoor capacity for months after the pandemic hit.
It’s also worth pointing out, though, that there was also an uptick in delivery orders during that period, allowing both stocks to offset some of their lost sales.
Nevertheless, it’s clear that Boston Pizza was impacted far greater than Pizza Pizza stock, and that looks like it would be the case again.
Not only is its yield higher than Pizza Pizza’s, suggesting that investors think the stock could have more risk, but its dividend is also just now back to the same payout it was pre-pandemic.
However, what’s positive for investors looking at Boston Pizza is that it has a payout ratio of just 83% today, giving it some margin of safety.
Is Pizza Pizza the better choice?
Although Pizza Pizza is also a discretionary restaurant stock, it does have more potential to weather a storm, as we saw in the pandemic due to the fact that it’s a low-cost option in addition to consistently innovating its menu to offer healthy options and having its own in-house delivery service, which can make it more appealing to consumers.
In fact, during the pandemic, its sales fell by just 14.5% in the first quarter and just 13.4% in the first full year, which is much less than the impact Boston Pizza saw.
Furthermore, while Pizza Pizza immediately cut its dividend by 30%, it never had to suspend it. And today, its dividend is slightly higher than where it was prior to the pandemic.
So, although both stocks have recovered well, Pizza Pizza saw a much smaller impact on its sales. With that being said, though, Pizza Pizza’s payout ratio today is 99%, leaving almost no margin of safety.
Therefore, although Boston Pizza has slightly more risk in this environment, it also has a better margin of safety with its dividend, giving it the slight edge for investors looking to buy a restaurant royalty stock today.
