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. It was on once on John Heinzl's Dividend Hog Portfolio, but has since been taken off.
When I was updating my spreadsheet, I noticed what I hate about analyzing this stock is that it is complex. You have to look not only at the PZA stock’s financials but also the financials for Pizza Pizza Limited (PPL). I never like complexity. It is too easy for me to miss something and it is too easy for a company to hide something. PPL pays a royalty to PZA based on sales, so you have to be sure that PPL is in a position to pay that royalty. Also, PPL owns current 23% of PZA.
My son likes pizza and I asked him about what he thought of this company’s pizza. He said that it was eatable. (Talk about damming with faint praise.) He said that they sometimes have good deals, but then so do other pizza places. I asked what he disliked and he said he did not like the crust and they could be stingy with the cheese. However, he also said that when they have their pizza at movie theatres and special events, it is more expensive but it is a much better product. He said he wished that they did the same thing in their regular outlets.
They have cut their dividends by 30% because of the Covid 19 lockdown and lower current sales. See their announcement here. This stock has also been falling since its high in 2017. It now only has a positive return since inception because of dividend payments.
The dividend yields are good to high with dividend growth nonexistent to low. The current yield is not that high compared to past times, but also the company has just decreased their dividends by 30%. The current dividend is high (7% and above) at 7.15%. The 5 and 10 year median dividends are good (5% and 6% ranges) at 5.71% and 6.65%. The historical median dividend is high at 7.92%.
The Dividend Payout Ratios (DPR) for PZA are fine, but I think that the only ones that count are for PPL. The DPR for 2019 for EPS is 101% with 5 year coverage at 99%. The DPR for CFPS for 2019 is 74% with 5 year coverage at 75%. The DPR for Free Cash Flow for 2019 is 102% with 5 year coverage at 100%.
The Royalty Payout Ratios (DPR) for PPL are too high. The RPR for PPL for earnings is 93.5% with 5 year coverage at 91.5%. As far as I can see, PPL’s cash flow cannot cover the royalty payments to PZA and has not been able to do so for the past 10 years. The payout ratio for 2019 is 877%. As far as I can see there is no FCF for PPL.
Debt Ratios for PZA are fine, but the important ones are for PPL. The Long Term Debt/Market Cap Ratio is 0.20. The Debt Ratio for 2019 is 4.89. The Intangible Assets/Market Cap Ratio of PZA is 1.46. Some 99% of the assets of PZA depend on PPL. The Liquidity Ratio for 2019 is 2.16. The Debt Ratio for 2019 is 4.89. The Leverage and Debt/Equity Ratios for 2019 are 1.77 and 0.36.
Debt Ratios for PZA are not satisfactory. The Long Term Debt (PPL)/Market Cap (PZA) is 0.82. The Liquidity Ratio for 2019 is 0.83 (and is too low because current assets cannot cover current liabilities). The Debt Ratio for 2019 is 0.61. If you add back in Deferred Gain (basically money they got but have not earned), the ratio is still low at 1.37, but at least over 1.00.
The Total Return per year is shown below for years of 5 to 14 to the end of 2019. Under the Capital Gain column is the portion of the Total Return attributable to capital gains. Under the Dividend column is the portion of the Total Return attributable to dividends. See chart below.
| From | Years | Div. Gth | Tot Ret | Cap Gain | Div. |
|---|---|---|---|---|---|
| 2014 | 5 | 1.39% | -0.01% | -6.94% | 6.93% |
| 2009 | 10 | -0.83% | 13.21% | 3.13% | 10.08% |
| 2005 | 14 | 0.81% | 8.26% | -0.17% | 8.42% |
The 5 year low, median, and high median Price/Earnings per Share Ratios are 14.27, 17.36 and 19.16. The corresponding 10 year ratios are 14.19, 15.97 and 18.15. The corresponding historical ratios are 12.85, 15.14 and 17.00. The current P/E Ratio is 9.87 based on a stock price of $8.39 and 2020 EPS of $0.85. This stock price testing suggests that the stock price is relatively cheap.
I get a Graham Price of $12.63. The 10 year low, median, and high median Price/Graham Price Ratios are 0.93, 1.04 and 1.17. The current P/GP Ratio is 0.66 based on a stock price of $8.39. This stock price testing suggests that the stock price is relatively cheap.
I get a 10 year median Price/Book Value per Share Ratio of 1.46. The current P/B Ratio is 1.01 based on a Book Value of $205M, Book Value per Share of $8.34, and a stock price of $8.39. The current ratio is 31% below the 10 year ratio This stock price testing suggests that the stock price is relatively cheap.
I get a 10 year median Price/Cash Flow per Share Ratio of 11.19. The current P/CF Ratio is 7.22 based on Cash Flow of $28.6M, Cash Flow per Share estimate for 2020 of $1.16 and a stock price of $8.39. The current ratio is 36% below the 10 year ratio. This stock price testing suggests that the stock price is relatively cheap.
I get an historical median dividend yield of 7.92%. The current dividend yield is 7.15% based a dividend of $0.60 (after the recent cut) and a stock price of $8.39. The current dividend yield is 9.7% below the historical dividend yield. This stock price testing suggests that the stock price is relatively reasonable but above the median.
I get a 10 year median dividend yield of 6.65%. The current dividend yield is 7.15% based a dividend of $0.60 (after the recent cut) and a stock price of $8.39. The current dividend yield is 7.6% above the 10 year dividend yield. This stock price testing suggests that the stock price is relatively reasonable and below the median.
The 10 year median Price/Sales (Revenue) Ratio is 0.54 for Royalty System Sales. The current P/S Ratio is 0.40 based on 2020 Sales estimate of $513M, Sales per Share of $20.84 and a stock price of $8.39. The current ratio is 26% below the 10 year ratio. This stock price testing suggests that the stock price is relatively cheap.
Results of stock price testing is that the stock price is relatively cheap. The P/S Ratio test showing the stock price as cheap does not line up with the dividend yield tests because dividends have recently been cut. There are no problems that I can see with the rest of the tests which are showing the stock price as cheap.
Is it a good company at a reasonable price? I must admit I worry about the ability of Pizza Pizza Limited to pay the royalties. They seem to be paying out a very high percentage of their income. The cash flow is complex. All the accounting is complex because PPL owns 23% of PZA and so really does not have to pay the full royalties. I took that into account when looking at cash flow though and the results were not good. If I missed something, then that is even a better reason for me not to invest in this company if I do not understand the accounting. This is a company I have no plans to invest in.
When I look at analysts’ recommendations, I find a Buy (1) recommendation. It seems only one analyst is following this stock. The consensus would be a Buy. The 12 month stock price consensus is $9.00. This implies a total return of 14.42% with 7.15% from dividends and 7.27% from capital gains.
See what analysts are saying on Stock Chase . The last 5 recommendations are Don’t Buy. Vineet Kulkarni on Motley Fool thinks the company is better place for recovery than regular restaurants. A writer on Simply Wall Street likes that this company’s beta is close to the market’s. A writer on Simply Wall Street does not like the payout ratios. See the company’s review of the first quarter of 2020 on Newswire.
Pizza Pizza Royalty Corp., through its subsidiary, Pizza Pizza Royalty Limited Partnership, owns and franchises quick-service restaurants under the Pizza Pizza and Pizza73 brands. Its web site is here Pizza Pizza Royalty Corp.
The last stock I wrote about was about was Canadian Utilities Ltd (TSX-CU, OTC-CDUAF) ... learn more. The next stock I will write about will be HLS Therapeutics Inc (TSX-HLS, OTC-HLTRF) ... learn more on Friday, May 22, 2020 around 5 pm. Tomorrow on my other blog I will write about Top 100 Dividend Stocks.... learn more on Thursday, May 21, 2020 around 5 pm.
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