CA - Pizza Pizza Royalty: An Income Investor Feast

2023-09-12 05:49:19 ET

Summary

• Pizza Pizza Royalty offers a robust 6.25% dividend yield and has potential for dividend growth even in a difficult consumer environment.
• The company's strong same store sales growth, particularly in its Pizza 73 brand, has contributed to its overall performance and dividend increase.
• Menu innovation and store renovations have helped attract middle-class customers and drive foot traffic, with carry-out outperforming delivery in the quarter.

Pizza Pizza Royalty ( PZA:CA ) (PZRIF) is one of the best ways right now to get a significant dividend yield in Canada. PZA is paying a robust 6.25% dividend yield with potential to grow that dividend even in a difficult consumer environment. Consumers continue to trade down on items to save money, which is directly benefitting Pizza Pizza. The company provides more bang for your buck than other Pizza companies in Canada, allowing them to increase market share. While the number of restaurants being added to the royalty pool is limited by the current macroeconomic climate, the same store sales will continue to drive dividend growth. Let's dive into the most recent quarter and see how it has led to a strong 2023 performance for shares.

Q2 2023 results - Exceptional same store sales

The second quarter was more of the same - strength from both of Pizza Pizza's main brands. Consumers continue to focus on value and the offerings are really resonating with cost conscious consumers in this inflationary period. Same store sales growth is the most important metric for a mature business such as Pizza Pizza. Same store sales growth was 9.4% for the overall business even after a huge 20.3% comparison from the prior year. The company pointed out it has very successfully passed on a price increase as the customer base is seeing the value still at the new prices. As the company is only adding 2-3% new restaurants per year, it is essential to have mid single digit growth in store level sales to boost the dividend. This year they added 17 restaurants up to a total of 743. An important distinction to note is that while the fund gets 6% royalty on Pizza Pizza, its Pizza 73 brand is actually a larger 9% royalty. This gives a bit more weighting to Pizza 73's 100 stores, even though it's a relatively small portion of the business at approximately 18% of royalty income in Q2. Strong performance of Pizza 73 of late is certainly part of the reason the stock has performed so well. Adjusted earnings per share followed the strong sales growth with 11.8% EPS growth year over year. This shows the dividend increase is very in line with the growth of the underlying business.

The result has been a 11.4% dividend increase year over year, to 7.5 cents per month from 6.75 cents/month. At a 6%+ yield with the stability of a royalty company this is very impressive growth and it shows no signs of slowing. As you can see below the strong results are reflected in the share price of late. Dividend growth is the primary driver of royalty company price appreciation since it determines long term viability of dividend payout. As you see below the dividend per year has went up from 5 cents monthly to now 7.5 cents in just 2.5 years. The growth has been very consistent as sales have continued a strong trajectory. This is a 95% payout ratio thus far in 2023, showing even at the current sales level we are likely to see another increase to the dividend after Q3 results. This growth has potential to continue which is reflected in the continued strong performance of the stock, up 10% over the past year. Once the share price stops going up that would be a warning sign the yield may be topping out, but for now that risk seems low.

Menu innovation continues to be important for the resurgence in the business. Upscaling their poutine offerings has proven very effective as it is a staple among Canadian consumers. They called out the buffalo chicken poutine, buffalo chicken sandwich and gourmet thin crust pizza as sale drivers in the past few months which were introduced in 2022. For many years the menu options were stagnant, but recent changes have likely brought back many middle class customers taking another look. Recent renovations to the stores has helped in this area as well, as they modernized their storefront look for improved foot traffic. The company also noted that they have a large number of storefronts, which may be a tailwind since it makes carryout easier for customers. They noted that carry-out actually outperformed delivery in the quarter. This seems logical as delivery fee and tip can add up to a significant amount and customers seeking value are taking advantage by utilizing carry out. Chains or single stores with only one location are a disadvantage in this area - to Pizza Pizza's benefit.

Conclusion - Strong buy

PZA is the top pick for someone looking for a stable business, with positive ESG and long term dividend increases. The stock is capable of some decent capital appreciation as well over long term, as they continue to execute with a dominate market position in Canada. Longer term the company may begin to expand, as the company now has 3 locations open in Mexico - an interesting development. The company is a small cap and can be thinly traded some days so make sure to use limit orders when accumulating your position. The brand has proven it has loyalty through strong distribution in Canada with it a staple at sporting events and festivals. The continued trading down to value will help them further, as they are less expensive than many pizza competitors. I have Pizza Pizza Royalty Corp strong buy rated for this macro, with a growing dividend and good prospects for the coming 12 months.

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