Is Pizza Pizza’s Dividend in Danger After the Company Posted an Underwhelming Q4?

With Pizza Pizza’s sales expected to slow in the coming quarters, is its dividend sustainable, or is it at risk of being trimmed?

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Dividend investing has a tonne of benefits, which is why it’s no surprise that it’s so popular among Canadian investors. And while there are plenty of high-quality dividend stocks to consider on the TSX, there’s no question that Pizza Pizza Royalty (TSX:PZA) is one of the top investments to consider.

There are plenty of reasons why Pizza Pizza is a dividend stock that investors should consider adding to their portfolios.

First off, it’s a stock that’s made for dividend investors. Not only does it have a business model that helps to mitigate risk for investors and increase cash available for dividends, but the stock also returns cash to investors monthly.

In addition, because Pizza Pizza constantly aims to pay essentially all its free cash flow back to investors, the stock consistently offers an attractive dividend yield that’s one of the highest on the market. In fact, at the time of writing, the dividend yield Pizza Pizza stock is offering investors is more than 6.9%.

The one drawback of Pizza Pizza, though, that investors certainly want to be aware of is that because it’s constantly trying to keep its payout ratio right at 100%, any decline in earnings could quickly lead to the company trimming its dividend.

So, after its sales growth slowed down significantly in the fourth quarter of 2023, and with significant headwinds continuing to face discretionary businesses in the Canadian economy, let’s look at whether or not Pizza Pizza’s dividend is in danger.

Understanding Pizza Pizza’s dividend

Like most companies, Pizza Pizza’s sales are seasonal and fluctuate from quarter to quarter. So, it’s entirely possible that its payout ratio will exceed 100% in some quarters while being offset and below 100% in other quarters.

In fact, that’s precisely what happened in 2023. In the first quarter, the payout ratio was over 103%, but in the second, third, and fourth quarters, it was just 94%, 93%, and 95%, respectively. This helped offset Pizza Pizza’s first-quarter dividend and allowed it to grow its cash reserve from $7.5 million at the start of the year to $8.2 million by the end.

This is essential to understand because a single quarter or even two where it pays out more than it earns isn’t exactly a warning sign that the dividend is under pressure. As long as the payout ratio for the full year is under 100% and is sustainable going forward, then there shouldn’t be much cause for concern.

With that being said, though, looking ahead, analysts expect its sales growth will slow down considerably. Right now, 2024 estimates point to sales growth of just 3.4%. Furthermore, analysts expect its normalized earnings per share to increase by just 2.1% in 2024.

That’s one of the main reasons Pizza Pizza hasn’t increased its dividend in five months, the longest it’s gone without doing so since the pandemic.

What’s in store for the quick service restaurant in 2024?

With so much uncertainty persisting in the current economic environment, there are certainly still significant headwinds to be aware of. Interest rates continue to remain at elevated levels, incentivizing consumers to pay down debt or invest their cash rather than spend.

And anytime consumers are looking to cut back on spending, eating out is typically one of the first expenses they look to cut down on.

At the same time, though, Pizza Pizza is well-known as a low-cost and convenient option, one of the main reasons why it’s such a reliable and high-quality dividend stock.

This reliability has been on display before, as recently as the pandemic, when numerous restaurant stocks had to suspend their dividends altogether, while Pizza Pizza only had to trim its dividend by 30%.

The company’s well-known brand, low-cost food offerings and convenient hours, typically open later than most of its competitors, have helped Pizza Pizza weather past economic headwinds and are a key reason why it’s such an excellent dividend stock.

So, although the current economic environment is full of uncertainty and its growth potential may be limited in the near term, Pizza Pizza doesn’t appear to be at significant risk of needing to trim its dividend at the moment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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