Pizza Pizza (TSE: PZA) is a stock that is likely best suited for income investors due to its high yield and predictability. As a low-cost alternative to its competitors, it may also potentially benefit from a slowing economy.
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The company owns and franchises quick-service restaurants under the Pizza Pizza and Pizza73 brands.
Pizza Pizza is a Predictable Company
When analyzing Pizza Pizza’s return on equity over the past five years, investors will be able to see that the company is reasonably predictable. In fact, its ROE held steady at 10% from 2017 to 2020 and only recently fell slightly to 8% in 2021 and the last 12 months.
This level of predictability can be achieved because Pizza Pizza only collects royalties from its franchisees. Thus, it doesn’t have to deal with supply chains and inventory directly. As a result, the company has been able to maintain steady profit margins in the mid-70% range over the past several years.
In addition, prior to pandemic disruptions, the company had been consistently growing steadily at low single-digit growth rates. Although sales haven’t fully recovered to pre-pandemic levels, they aren’t too far away and have returned to growth.
This may also ease investors who are worried about an economic slowdown. It’s unlikely that the company’s operations will be severely impacted during a recession. This is especially true since it’s a low-cost alternative to other pizza chains, and consumers are still going to want to eat pizza in a recession. Therefore, price-conscious customers could possibly choose to eat at Pizza Pizza.
Pizza Pizza Serves Investors a Tasty Dividend
The steady growth in revenue translates into steady dividend growth. For income-oriented investors, Pizza Pizza’s dividend yield is 6.6% on an annualized basis. When taking a look at PZA’s historical dividend yield, you can see that it has been quite volatile:
At 6.6%, the current yield is on the low end of the range, indicating that income-oriented investors are paying a premium relative to yields they have been able to receive in the past.
Analyst Derek Lessard Recommends Holding Pizza Pizza Stock
PZA stock only has one analyst covering it. It has a Hold rating from analyst Derek Lessard of TD Securities. Two months ago, he placed a 12-month price target of C$14 per share, which implies 13.6% upside potential.
It’s worth noting that Derek Lessard has a 100% success rate on his Pizza Pizza stock ratings, with an average profit return of 25.5% per rating.
Who Should Invest in Pizza Pizza?
Investors who are income-oriented or want a defensive portfolio might want to consider Pizza Pizza stock. The company is predictable and highly profitable since it mostly collects franchise fees, thus making it a solid choice for periods of economic slowdowns.
