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This is why you NEVER just buy the dividend.
Published about 2 months ago • 4 min read
Papa John's (PZZA) was yielding over 6% and that dividend looked shiny and tempting.
I'm not going to pretend I didn't notice.
It's been sitting on the fringes of my radar for a couple years now, price sliding, yield climbing and my daughter loves their pizza. (Reminder: liking the product doesn't make it a good investment. Plenty of us loved Blockbuster Video too.)
Being attracted to a fat yield is fine. Normal, even. A largemouth bass sees something shiny and thinks food.
The bass just doesn't stop to ask why it's shiny. That's how it ends up in a frying pan.
Last week, Papa John's suspended the dividend. Not trimmed. Suspended. Like, now with a yield of 0.00%!
Could you have seen it coming?
Oh, heck yeah and here's some of the low hanging red flags:
🚩 Sales falling for almost 3 straight years. $2.14B down to $1.97B. Tough to run a business when fewer fresh dollars come through the front door.
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🚩 Free cash flow per share is collapsing. $4.23 in 2020. Seventy-five cents today. Free cash flow is the stuff that pays you your dividend.
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🚩 They were paying out 246% of free cash flow. Every dollar they had, plus money they didn't have. Nobody runs a healthy company that way.
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🚩 Dividend frozen since 2024. A freeze is management saying "we can't raise this" without actually saying it. They're treading water, trying to right the ship.
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🚩 $907M of net debt against an $806M market cap. They owe more than the entire company is worth. Talk about a bucket of yuck!🤮
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🚩 Interest coverage down to 2.60. That's $2.60 of operating profit for every $1 of interest owed. It was 9.45 back in 2021. Here's the thing — a company MUST pay its interest, same as you and me. The dividend? That's written in pencil. When survival comes into question, pencil gets erased.
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🚩 A takeover rumor in June that conveniently popped the stock and squeezed the shorts. Smoke cleared. Shorts came right back.
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So what actually happened here?
Papa John's built its whole brand on being the premium pizza. Then everybody started hunting for deals. Competitors leaned into discounts and built better apps. DoorDash showed up and made delivery something any restaurant could do.
Now they're closing 300 stores and spending big to dig out. That money had to come from somewhere.
It came from your dividend.
The stock is down 80% over five years. The market isn't always right — that's exactly where the money gets made when you're right and it's wrong. But when it's screaming this loudly for this long, you'd better have a real reason to disagree.
When a company waves more red flags than a Chinese communist party parade, it's probably best to just stay away. Anybody who bought this JUST for the yield is about to learn a lesson that leaves a worse taste in their mouth than pineapple-and-anchovy pizza.
Many ioncome investors are wondering if Verizon (VZ) is a good buy as the share price continues to fall and the dividend yield rises. Brian at SimplySafeDividends tackles that question.
Very cool conversation with The Warren Buffett Portfolio author Robert Hagstrom about how investing is most intelligent when its most business like and other nuggets of investing wisdom.
Disclaimer: This is not investment advice. Do your own research before making any investment decisions.
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