Monday, May 15, 2017

Pizza Pizza Royalty Corp

Sound bite for Twitter and StockTwits is: Good Dividend Payer. I hate the complexity of the accounting because it is easy to make mistakes in my analysis. Complexity comes in because PPL owns royalties to PZA, but PPL also owns a part of PZA and received income from it. I will not be buying PZA for my TFSA account as I cannot ignore the fact of the relatively high price. See my spreadsheet on Pizza Pizza Royalty Corp.

I do not own this stock of Pizza Pizza Royalty Corp (TSX-PZA, OTC-PZRIF). A number of people have recommended this stock, so I decided to take a look at it. There is nothing inherently wrong with this type of royalty corp. I do not like the complexity of the accounting and having to evaluate both companies involved. The more complex a situation the more likely one can make an error in evaluating a company.

One of my concerns about this type of company is whether or not the under lying entity can afford to pay the royalty payments required to the Royalty Corp so that they can pay dividends. The accounting done by the Royalty Corp and the underlying entity is not always easy to follow. However, at the moment the underlying entity, in this case Pizza Pizza Limited or PPL does perhaps get sufficient income and cash flow to cover their Royalty payments.

PPL in 2016 paid out 91.6% of their income in Royalties to PZA. The 5 year median is 76.18%. However, if we turn to cash flow the payout is higher. For 2016 the Royalties Payout Ratio is 264.12% with a 5 year median of 103.71%. Except I do not think the cash flow coverage is really that high because they take off from Cash Flow from Operations things like the income they received from PZA. I think that the real Cash Flow Coverage of Dividends is 91% with a 5 year median of 81%. (I could be wrong on this.)

On the other hand PPL has cash on hand in 2016 equal to 36.86% of the Royalties paid in 2016. The cash on hand over the past 5 years has equaled 43% of the Royalties paid. The current cash is from investment activities for the last 2 years. In 2015 they got cash from selling shares of PZA. In 2016 they got cash from short-term investments (which some was from the cash they got selling PZA shares). Also they get income from PZA each year.

Can PZA cover distributions? Traditionally you look at dividends per share to EPS and CFPS. Dividend Payout Ratio re EPS is 98.37% with a 5 year median also of 98.37%. The Dividend Payout Ratio for CFPS is 75.17% with a 5 year median of 72.56%. In this traditional method it looks like the dividends are covered.

When I suspect this is not the full story, I check the dividends paid in the Cash Flow statement with the Net Income of the Income Statement. The ratio of the net income to PZA dividends is 77.92%. However, PZA also pays dividends to PPL. So total dividends compared to net income is 102.55% in 2016 with a 5 year median of 103.39%. It would seem that they are paying more in dividends than net income.

I also looked Dividends compared to Cash Flow (net of WC). The payout ratio here is 98.95% with a 5 year median of 98.95%. PPL says that at the end of 2016 they own some 20.4% of PZA. (Note in these calculations I use the dividends paid by PZA to shareholders and paid to PPL. The Cash Flow is net of Working Capital. See my blog for further information on Cash Flow excluding Working Capital.) It looks like cash flow can cover dividends.

How much does PZA distribute re income? I have been told that PZA shareholders get the royalties paid by PPL. I wanted to see how much of these royalties are distributed to PZA shareholders. In 2016 PZA shareholders got 58.95% of the royalties with 5 year median of 52.79% and PPL got 18.64% of the royalties with a 5 year median of 22.79%. In total, PZA distributed 77.58% of the royalties in 2016 with a 5 year median of 76.71% of royalties received. PZA shareholders do not receive a high portion of the royalties in dividends.

The 5 year low, median and high median Price/Earnings per Share Ratios are 15.83, 17.36 and 18.87. The 10 year corresponding values are 14.19, 15.97 and 17.22. The values since this stock went public 12 years ago are 13.48, 15.35 and 16.96. So it would appear that part of the increase in the stock price is a rising P/E Ratio. The current P/E Ratio is 18.71 based on a stock price of $17.40 and 2017 EPS estimate of $0.93. This stock price testing suggests that stock price is relatively expensive.

I get a current Graham Price of $13.36. I get 10 year low, median and high median Price/Graham Price Ratios of 0.86, 0.98 and 1.10. The current P/GP Ratio is 1.30 based on a stock price of $17.40. This stock price testing suggests that stock price is relatively expensive.

I get a 10 year median Price/Book Value per Share Ratio of 1.25. The current P/B Ratio is 2.04 based on a stock price of $17.40 and BVPS of $8.53. The current P/B Ratio is some 64% higher than the 10 year median ratio. This stock price testing suggests that stock price is relatively expensive.

When this stock changed from an income trust to a corporation it decreased the dividends by some 25%. If you decrease the historical median dividend yield by 25% you get a yield of 6.34%. The 5 year median dividend yield is 5.87%. The current dividend yield is 4.92% based on dividends of $0.83 and a stock price of $17.40. The current dividend yield is 22.41% and 16.30% lower than the adjusted historical dividend yield and the 5 year median dividend yield. This stock price testing suggests that the stock price is relatively expensive.

I can only find one analysts following this stock and the recommendation is a Buy. The 12 month target price is $19.00. This implies a total return of 14.11% with 9.20% from capital gains and 4.92% from dividends.

Staff at Lenox Ledger says that using Value Composite score that PZA is neither overvalued or undervalued. John Heinzl on The Globe and Mail talks about PPL ownership in PZA. Frank Brewer at Simply Wall Street looks at PZA's debt levels. See what analysts have said about this company on Stock Chase.

Pizza Pizza is a large pizza operator in Canada, with more than 700 locations nationwide Pizza Pizza is the largest pizza operator in and a growing presence in Quebec. The income fund owns the Pizza Pizza (PP) and Pizza 73 (P73) trademarks and licenses these trademarks to Pizza Pizza Limited in exchange for a royalty of 6% and 9% of the gross sales of PP and P73, respectively. Its web site is here Pizza Pizza Royalty Corp.

The last stock I wrote about was about was Reitmans (Canada) Ltd. (TSX-RET.A, OTC-RTMAF)... learn more. The next stock I will write about will be Hammond Power Solutions Inc. (TSX-HPS, OTC- HMDPF)... learn more on Wednesday, May 17, 2017 around 5 pm. Tomorrow on my other blog I will write about a portfolio for the long term... learn more on Tuesday, May 2017 around 5 pm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

See my website for stocks followed and investment notes. I have three blogs. The first talks only about specific stocks and is called Investment Talk. The second one contains information on mostly investing and is called Investing Economics Mostly. My last blog is for my book reviews and it is called Non-Fiction Mostly. Follow me on Twitter or StockTwits. I am on Instagram. Or you can just Google #walktoronto spbrunner8166 to see my pictures.

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