Is Boston Pizza’s 9.5% Dividend Too Risky?

Boston Pizza Royalties Income Fund (TSX:BPF.UN) had been doing well this year until the fund released its most recently quarterly earnings. In the report, investors learned that same-store sales were a negative 4.2% during the period and year to date they are down 2.3%.

Same-store sales numbers are crucial when it comes to the restaurant industry as it’s the best indicator of organic growth, and that was clearly missing from Boston Pizza restaurants held in the fund.

Even looking at system-wide sales, which include new restaurants, sales were still down 2.3% from the prior year. It’s a troubling sign and it’s no surprise that the stock fell sharply after the earnings report. Year to date, the fund has fallen more than 9% and over the past two years it is down 35%.

With dividend payments still at $0.115 every month, investors would now be earning a yield of 9.5%. While impressive, it could also be too costly for the fund to maintain, especially if these disappointing growth numbers continue. From a profitability stand point, the fund is still in good shape, posting a positive net income figure in each of the past three quarters.

However, it’s on the cash flow side where things could get tight if the fund struggles down the road.

Over the past four quarters, the fund has generated free cash of $35.8 million, which has been more than enough to accommodate the $30.1 million in dividends paid out during that time.

And even though the stock is coming off a disappointing quarter, its free cash of $9.5 million was higher than what it had generated in each of the past three quarters.

There’s definitely some risk here, but from a cash perspective, the dividend still looks like it could be safe for the foreseeable future.