Could J & J Snack Foods Corp. (NASDAQ:JJSF) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
A slim 1.4% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, J & J Snack Foods could have potential. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. J & J Snack Foods paid out 41% of its profit as dividends, over the trailing twelve month period. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. J & J Snack Foods’s cash payout ratio in the last year was 44%, which suggests dividends were well covered by cash generated by the business. It’s positive to see that J & J Snack Foods’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
With a strong net cash balance, J & J Snack Foods investors may not have much to worry about in the near term from a dividend perspective.
Remember, you can always get a snapshot of J & J Snack Foods’s latest financial position, by checking our visualisation of its financial health.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. For the purpose of this article, we only scrutinise the last decade of J & J Snack Foods’s dividend payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past ten-year period, the first annual payment was US$0.39 in 2010, compared to US$2.30 last year. This works out to be a compound annual growth rate (CAGR) of approximately 19% a year over that time.
With rapid dividend growth and no notable cuts to the dividend over a lengthy period of time, we think this company has a lot going for it.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Earnings have grown at around 5.4% a year for the past five years, which is better than seeing them shrink! It’s good to see decent earnings growth and a low payout ratio. Companies with these characteristics often display the fastest dividend growth over the long term – assuming earnings can be maintained, of course.
To summarise, shareholders should always check that J & J Snack Foods’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It’s great to see that J & J Snack Foods is paying out a low percentage of its earnings and cash flow. Second, earnings growth has been mediocre, but at least the dividends have been relatively stable. Overall we think J & J Snack Foods scores well on our analysis. It’s not quite perfect, but we’d definitely be keen to take a closer look.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 3 analysts we track are forecasting for J & J Snack Foods for free with public analyst estimates for the company.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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