Pizza Pizza: Secure Dividend Paying Machine (TSX:PZA:CA)

I final wrote about Pizza Pizza (TSX:PZA:CA) 4 years in the past. Since then, the corporate has carried out effectively in mitigating COVID-19 impression and managing greater inflation and rates of interest. Immediately, the corporate continues to develop throughout the nation whereas closing poor-performing shops. It has lately expanded into Mexico by partnering with a neighborhood accomplice. I imagine such initiatives will proceed to make Pizza Pizza a powerful defensive play.

Pizza Pizza Royalty Corp. or Pizza Pizza is the proprietor of the emblems, commerce names, and mental property rights to the Pizza Pizza identify. Pizza Pizza in flip entered right into a license and royalty settlement with Pizza Pizza Restricted. This permits Pizza Pizza Restricted to make use of its emblems in return for a royalty charge, primarily based on system-wide gross sales.

Its Latest Dividend Hike Has Surpassed its Pre-Covid Peak

In Feb. 2024, Pizza Pizza hiked its dividends to $0.93 yearly or $0.0775 per thirty days. That is vital as a result of this dividend fee now matches its earlier peak from 2007 to 2010:

Supply: Pizza Pizza 2022 Annual Financials

In 2011, Pizza Pizza needed to lower its dividend fee as a result of revenue trusts turned taxable. In 2020, one other lower was introduced due to COVID-19. Nonetheless, after 2020, as an indication of enhancing enterprise situations, Pizza Pizza started rising its dividends yearly. In 2024, Pizza Pizza added ~40 new shops to its systemwide community. Pizza Pizza and Pizza 73 pays an annual royalty fee primarily based on the full systemwide gross sales in its community. Subsequently, the upper the variety of eating places within the community, the upper the quantity of royalties paid to Pizza Pizza.

Worldwide Growth into Mexico

Much like Tim Horton’s enlargement into worldwide markets, Pizza Pizza is beginning to make forays outdoors of Canada. In 2023, it signed a grasp franchisee settlement with Meals Guru to develop into Mexico utilizing the Pizzeria model in alternate for a 12.5% royalty.

Such an association has its advantages for Pizza Pizza as a result of no matter what number of eating places are opened or closed, a set money royalty cost is agreed upon. So among the operational dangers in its Mexico eating places shall be borne by the franchisee, Meals Guru. The administration crew at Pizza Pizza doesn’t have the operational know-how to function in markets outdoors Canada, and that is okay as a result of native companions (like Meals Guru) who perceive the nuances of the native market will are inclined to carry out higher.

The draw back right here is that Pizza Pizza has much less management over how its Pizza Pizza model is being operated outdoors of Canada. How profitable its Mexico eating places will carry out will rely solely on its franchisee, Meals Guru.

Steady Improvements in its Menu

Within the Canadian pizza market, Pizza Pizza is at all times in search of methods to construct a greater pizza. To adapt to totally different meals palates, the meals chain was one of many first to introduce cauliflower pizza, keto pizza crusts, and gluten-free pizza. In 2023, a brand new culinary chef was employed to additional innovate its meals menu.

Not too long ago, in response to buyer suggestions, Stromboli was added to its menu choices. Thus far, this menu merchandise has carried out effectively. Different newly launched meals gadgets embody stuffed crust pizzas, and garlic unfold brushed across the fringe of the pizza crust to introduce a brand new sort of Italian seasoning.

These minor tweaks to the meals choices could not imply a lot, however cumulatively, it reveals how Pizza Pizza is adapting to altering shopper’s tastes and is at all times making an attempt to maintain its menu recent to customers.

Leaner Provide Chain

In recent times, Pizza Pizza has taken steps to enhance its provide chain:

• Value financial savings by lowering the variety of deliveries to its eating places
• decentralized its manufacturing by altering to a provider with a number of manufacturing crops throughout Canada, in comparison with a single plant in Ontario. This has decreased potential provide disruptions by diversifying manufacturing throughout Canada.
• Retailer enlargement is made simpler as a result of Pizza Pizza controls 90% of its distribution. Up to now 3 years, the corporate has opened 130 new eating places with minimal disruptions.
• To reduce supply prices, provides are bought in bulk and shipped in tankers or large totes

These initiatives have allowed the corporate to introduce new menu choices and develop its shops throughout Canada seamlessly.

Revenue Margins Steadily Growing

An revolutionary meals menu and a powerful provide chain have helped enhance Pizza Pizza’s backside line lately. Its foray into Mexico by a grasp franchisee settlement will solely add to Pizza Pizza’s future income.

In trying on the firm’s funds utilizing the Piotroski F-Rating (the place a rating of 1 implies the corporate is financially weak and a rating of 9 reveals the corporate is financially robust), it is clear the pizza chain is on an upward trajectory:

Supply: Pizza Pizza Monetary Statements

Up to now 3 quarters, the corporate’s F-Rating had a spread of between 5 and seven. Yearly, it had a rating of seven in 2021 and 2022. This reveals the corporate is in a comparatively robust place financially.

Its present ratio has a rating of three to 1, and it has a low debt-to-equity ratio. In at the moment’s atmosphere of high-interest charges, the corporate is preserving its prices down by borrowing much less. On the capital entrance, the final time Pizza Pizza did an fairness elevate was in 2020. Retailer progress was achieved with out rising debt or fairness.

Over the previous 3 years, earnings per share have been steadily climbing and reaching $0.86 EPS in 2022, surpassing its pre-Covid determine of $0.85.

Pizza Pizza shall be saying its upcoming monetary leads to early March 2024. I imagine the upcoming monetary outcomes shall be optimistic for the pizza chain. Mainly due to just a few causes:

• Inflation stays stubbornly excessive
• Shoppers are consuming out much less
• In Canada, regardless of job positive aspects in January 2024, there proceed to be layoffs throughout varied industries

There’s a whole lot of uncertainty within the Canadian economic system and that is forcing customers to dine out much less, and inflation is eroding shopper’s spending energy. These elements are forcing customers to eat out much less. Since pizza is a reasonable meals merchandise, I foresee pizza gross sales to be a boon on this economic system. It is not a shock Pizza Pizza has seen its earnings per share rise every quarter, whereas customers proceed to be apprehensive about their monetary state of affairs.

Pizza Pizza Restricted Exhibits Weaker Financials

As defined earlier than, Pizza Pizza or Pizza Pizza Royalty Corp licenses its trademark to an organization referred to as Pizza Pizza Restricted. Pizza Pizza Restricted is a non-public firm and pays its royalty charges to Pizza Pizza or PZA:CA. Pizza Pizza Restricted faces unfavorable fairness in its stability sheet and its money place has been decreased by half from Oct. 2023 in comparison with a 12 months in the past:

Supply: Pizza Pizza Restricted Q3-2023

Based mostly on the monetary statements, it seems retailer upgrades and renovations are being spent on this entity, and that is among the explanation why it’s inflicting a drag on earnings.

In a complete grand scheme of issues, Pizza Pizza Restricted displaying working losses and declining money just isn’t an enormous reason for concern as a result of Pizza Pizza won’t let this entity, Pizza Pizza Restricted, go underneath.

Conclusion: A purchase for dividend traders

Pizza has at all times been a staple for customers in search of a fast chew. Whether or not the economic system is doing effectively or not, there’ll at all times be a requirement for pizza.

This chain can also be strategically situated in widespread sports activities arenas and different vacationer sights (for instance Toronto Zoo). In a means, this provides Pizza Pizza a monopoly in sure areas that different fast-food eating places can’t compete in.

Its robust distribution and provide chain community ensures it may possibly hold prices flat. As for constructing extra eating places, administration has admitted there are solely so many Pizza Pizza eating places the Canadian market can help. Because of this the grasp franchisee settlement with Guru Meals was a secure enlargement enterprise. Pizza Pizza lets the native franchisee cope with the logistics and operations whereas having fun with a wholesome 12.5% royalty charge.

Dividend-focused traders ought to give Pizza Pizza an opportunity. Its dividends have risen yearly, and the 2 occasions when it needed to lower dividends have been due to occasions outdoors of its management. The primary time was taxing revenue trusts (which Pizza Pizza operated again in 2010), and the second time was Covid, which was past administration’s management.

Buyers should not going to see large capital appreciation right here, however its administration likes to maintain threat low, and this makes its dividends largely predictable. I am bullish on Pizza Pizza.

Editor’s Be aware: This text discusses a number of securities that don’t commerce on a significant U.S. alternate. Please concentrate on the dangers related to these shares.