The equity markets are witnessing higher buying this month amid signs of inflation cooling down and a pause in interest rate hikes. The S&P/TSX Composite Index rose 6.5% this month. However, concerns over the political instability in the Middle East still persist. So, investors can strengthen their portfolios by adding quality stocks that pay dividends at a healthier rate. Given their regular payouts, these companies are less susceptible to market volatility. Also, the stable passive income from dividends would lower the impact of rising prices in this challenging macro environment.
My top pick would be Pizza Pizza Royalty (TSX:PZA), which owns and operates Pizza Pizza and Pizza 73 brand restaurants through franchisees. Let’s look at its performance in the first three quarters of this year.
Pizza Pizza Royalty’s recent performance
Despite the inflationary environment, PZA has posted solid performance in the first three quarters. The company operates a highly franchised business, collecting royalties from its franchises based on their sales. So, its financials are not susceptible to rising commodity prices and wage inflation. Besides, the company has grown its same-store sales by 9.8% during the first three quarters while increasing its restaurant locations by 16 to 743.
The growth in traffic and higher check size drove its same-store sales. The company passed on its increased expenses to its customers by raising its menu prices, which increased its cheque size. Besides, innovative product launches, strong value messaging, and promotional activities drove its footfalls. Amid this solid operating performance, the company’s royalty pool income and adjusted EPS (earnings per share) increased by 11.6% and 12.2%, respectively.
Supported by these solid financials, PZA’s management has raised its dividends three times this year. It currently pays a monthly dividend of $0.0775/share, with a forward yield of 6.42%. The company has adopted a policy to distribute all the available cash after making consideration for reasonable reserves. These reserves will stabilize its dividend payouts while funding its expenditures in case of seasonal variations. For the first three quarters, its payout ratio stood at 97%. Now, let’s look at its growth prospects.
Growth prospects
After adding 18 restaurants to its royalty pool in the first three quarters, PZA also opened two traditional and two non-traditional restaurants while closing one traditional restaurant. These restaurants will be added to its royalty pool starting next year.
Further, the company continues its restaurant construction across the country amid lifting the mandated restrictions imposed by the government on commercial construction. The management hopes to increase its restaurant network by 3–4% this year while continuing its renovation program. Besides, given its value proposition and convenience, I expect its same-store sales to remain strong. So, I believe PZA is well-positioned to continue paying dividends at a healthier rate.
Bottom line
PZA has an excellent record of raising dividends for the last three years. It has increased its monthly dividends eight times since April 2020. Besides, it trades at an attractive valuation, with its NTM (next 12 months) price-to-sales and NTM price-to-earnings multiples of 0.7 and 15.9, respectively. So, considering its stable cash flows, high dividend yield, and cheaper valuation, I believe PZA would be an excellent buy right now.
