Reposted from Seeking Alpha
By Brian Langis
Pizza Pizza Royalty Corp.
Canada TSX: PZA
US: OTC: OTC:OTC:PZRIF
Pizza Pizza Royalty Corp. is primarily traded on the Toronto Stock Exchange under the sticker PZA.
Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.2682 Price of 1 USD in CAD. Source: Bloomberg
Pizza Pizza Royalty Corp. (OTC:PZRIF) is a former Canadian income trust that owns the trademarks and trade names Pizza Pizza and Pizza 73. The intellectual property is used by Pizza Pizza Limited (NYSE:PPL), a private operating company. Folks from Ontario and Alberta are familiar with the Pizza Pizza or Pizza 73 restaurant chain and their famous 11-11 jingle (or 73-73 in the West). Even though the American chain Little Caesars uses the expression “pizza pizza!” as its slogan, it’s completely unrelated to PZA.
The focus of this article is to better understand the company and if it’s worthy as a fixed income investment. As I will explain later, few investors actually understand the structure of PPRC. In this research the name Pizza Pizza, Pizza 73, PZA, and PPRC are used interchangeably. As mentioned above, PPL is referred to the privately owned company that operates the two brands. You can’t invest in PPL but its financial statements are declared with PPRC under “operating entity”.
PZA has a current dividend yield of ~5.4% that pays sustainable and growing dividends. Pizza Pizza is well known where their restaurants have a presence, but as an investment, I don’t think anyone knows that it’s publicly traded. Pizza Pizza Royalty Corp. (NYSEARCA:PZA) is rarely mentioned in the financial media and has one analyst covering it. There’s also no coverage on Seeking Alpha. This is an income oriented investment for people who like monthly dividends. By investing in PZA, you acquire predictable, growing royalty streams from their portfolio of restaurants.
When you invest in Pizza Pizza/PPRC, you are buying a royalty corp. PPRC owns two assets, the trademark to Pizza Pizza and Pizza 73. PZA has licensed the rights and marks to PPL. PPL pays a 6% royalty on the system sales of the Pizza Pizza included in the Royalty Pool and a 9% royalty for the Pizza 73 included in the Royalty Pool.
I highlighted the bold statement above because a lot of investors are under the perception that they are directly invested in the operating restaurant chain Pizza Pizza Limited. When I spoke to the CFO, Curtis Feltner, he told me that most portfolio managers that call him are surprised to learn that they are invested in a royalty corp. and not the operating company, even though the words royalty corp. are part of the official name. I would assume that most investors simply look at the dividend yield and their monthly deposits to justify their investment. The reality is there’s a lack of knowledge among investors regarding the company. I understand the confusion. Over the years PPRC and PPL have undergone change in their corporate structure that demands further attention where I will go into further detail.
I will also analyze the dividend. Since I’m skeptical by nature, when I see dividend yield north of 5%, I have to investigate. Many questions pop into mind such as: Is a dividend cut expected? Is it sustainable? Is there anything wrong with the company? What’s the payout ratio? Is there a chance of permanent capital loss?
Buying PZA five years ago would have been very rewarding since your investment that would have more than doubled (not including dividends). It also crushed the TSX, which has returned 31% compared to the 102% by PZA.
The full article is available at Seeking Alpha