When the market environment becomes uncertain, and stocks across essentially every sector are falling in value, savvy investors know it’s one of the best opportunities you get to buy stocks on the cheap. Even stocks that have been performing lately, such as Pizza Pizza Royalty (TSX:PZA), have lost value in recent months, creating cheap stock prices and attractive dividend yields.
The only problem for investors is that with so many stocks trading undervalued, it can be difficult to decide which stocks to invest your hard-earned money in.
Generally, the cheaper the stocks you’re looking at buying, the more significant the headwinds they’re facing today, and consequently, the more risk they have.
That’s why a stock like Pizza Pizza is intriguing. It hasn’t fallen as much as other businesses, down roughly 12.7% in the last three months.
However, given its impressive performance lately, the fact that it’s sold off at all is intriguing, especially since its dividend yield continues to increase as it falls in price.
In fact, in just the last three months, as it’s fallen by over 12.5%, its dividend yield has risen from right around 6% to the more than 6.8% it sits at today.
So, if you’re looking at buying a high-quality dividend stock in this environment, let’s explore whether Pizza Pizza is worth an investment today.
Is Pizza Pizza stock worth buying in this uncertain market environment?
Although the market environment has been causing the majority of stocks in Canada to lose value as uncertainty increases and bond yields continue to rise, it’s also important to note that restaurant stocks like Pizza Pizza also have higher risk today due to the worsening economic environment.
Higher costs of living as well as higher interest rates, are impacting the budgets of consumers, leaving less money each month for discretionary spending, like eating out at a restaurant.
In this regard, Pizza Pizza is actually one of the best restaurant stocks to consider since it’s a quick-service restaurant and a convenient and affordable option. Nevertheless, the entire industry faces increased headwinds in this environment, which is important to consider before investing in this environment.
Despite these headwinds, though, which have persisted for over a year now, Pizza Pizza has continued to perform exceptionally well. In fact, in the last four quarters, as the economy has been struggling, Pizza Pizza grew its sales by 12.7% year over year.
That’s impressive growth in any market environment, especially because the stock has already recovered from the pandemic and is now earning and paying out more cash to investors through dividends than it did before the pandemic hit.
So, as Pizza Pizza stock continues to decline, it certainly looks like one of the best stocks to buy now, especially if you’re looking to buy dividend stocks.
Is the dividend safe?
Since Pizza Pizza is a royalty stock and since nearly all of the returns investors expect to make are through the dividend, the stock typically keeps its payout ratio right under 100%.
That doesn’t necessarily mean the dividend is at risk, though, especially if the restaurant royalty stock continues to grow its sales rapidly.
In the last four quarters, Pizza Pizza has earned a net income of more than $29.5 million, yet it paid out roughly $29 million in dividends. That’s not a huge margin of safety, but Pizza Pizza stock also has a reserve cash fund in case sales and income temporarily fall for a quarter or two.
If the stock was impacted for longer than a couple of quarters, or more significantly than management expects, it could run into problems, though, and need to slightly trim the dividend.
So, although Pizza Pizza looks attractive today and the 6.8% yield is attractive, in this environment, as with almost every stock in Canada, it’s essential to proceed with caution and continue to stay up to date with its performance.
If you’re looking to gain exposure but worried about the risk, you could decide to take an initial position today and then use the dollar cost-averaging strategy over the next few quarters to lower your risk in this uncertain environment.
