The Canadian equity markets are upbeat amid the United States Federal Reserve’s 50 basis points interest rate cut last month. The S&P/TSX Composite Index is up 14.4% for this year. However, the escalating Middle East conflict is a cause for concern. Given the uncertain outlook, investors should look to buy quality dividend stocks to earn a stable passive income while strengthening their portfolios.
Against this backdrop, let’s assess whether Pizza Pizza Royalty (TSX: PZA) would be an excellent dividend stock to buy right now. The company has adopted an asset-light business model, operating 672 Pizza Pizza and 102 Pizza 73 brands through its franchisees. It collects royalty from these franchisees based on their sales. So, its financials are less susceptible to rising commodity price fluctuations and wage inflation, thus generating stable and predictable cash flows.
Let’s look at its recently reported second-quarter performance and growth prospects.
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PZA’s second-quarter performance
PZA’s royalty pool sales fell 2% to $155.4 million. The 5.1% decline in Pizza Pizza brand’s same-store sales led to a decline in the company’s royalty pool sales. Meanwhile, 3.7% same-store sales growth in Pizza 73 brand restaurants and an increase of 31 restaurants to its royalty pool have offset some of the declines.
Further, the company witnessed increased administrative expenses during the quarter, partially offset by increased interest income. Meanwhile, its adjusted EPS (earnings per share) fell 3.3% to $0.238. Its payout ratio stood at 109%, a substantial increase from 95% in the previous year’s quarter. Its working capital reserve declined by $1.4 million to $6.8 million amid lower royalty income and a high payout ratio. Let’s look at its growth prospects.
PZA’s outlook
Despite the negative same-store sales, PZA’s management expects to retain or win new customers through its high-quality, value-oriented menu offerings. The company expects its omnichannel presence to help enhance its customers’ convenience, thus driving its sales. The company, which has opened 25 restaurants in Canada and two in Mexico, is continuing its developmental works and hopes to increase its traditional restaurant network by 3-4% this year.
Further, the company is also continuing its renovation program, which could lead to higher footfalls in the coming quarters, thus supporting its sales.
Dividends and valuation
PZA intends to distribute all available cash to its shareholders to maximize their returns. However, the company allows reasonable reserves due to seasonal variations inherent to the restaurant industry and to smoothen out its dividend payouts. Last year, PZA raised its monthly dividends three times with an aggregate increase of 10.7%. However, the company has not hiked its dividends this year due to the challenging macro environment. It currently pays a monthly dividend of $0.0775/share, with its forward yield at 7.08%.
Moreover, PZA trades at a reasonable valuation, with its price-to-book and next-12-month price-to-earnings multiples at 1.4 and 13.4, respectively.
Investors’ takeaway
PZA has been under pressure this year, losing 5.7% of its stock value. Weak quarterly performances and high payout ratios have made investors worry about the sustainability of its dividends. However, falling inflation and monetary easing initiatives could boost economic activities, thus increasing footfalls at PZA’s restaurants. Considering all these factors, I believe PZA would be an excellent buy at these levels.
