Is Jack in the Box Inc. (NASDAQ:JACK) A Smart Pick For Income Investors?

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Is Jack in the Box Inc. (NASDAQ:JACK) a good dividend stock? How would you know? Dividend paying companies with growing earnings can be highly rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.

Investors might not know much about Jack in the Box’s dividend prospects, even though it has been paying dividends for the last five years and offers a 1.9% yield. A 1.9% yield is not inspiring, but the longer payment history has some appeal. The company also bought back stock equivalent to around 11% of market capitalisation this year. Some simple research can reduce the risk of buying Jack in the Box for its dividend – read on to learn more.

Explore this interactive chart for our latest analysis on Jack in the Box!

NasdaqGS:JACK Historical Dividend Yield, June 25th 2019
NasdaqGS:JACK Historical Dividend Yield, June 25th 2019

Payout ratios

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. Jack in the Box paid out 35% of its profit as dividends, over the trailing twelve month period. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Of the free cash flow it generated last year, Jack in the Box paid out 42% as dividends, suggesting the dividend is affordable. It’s positive to see that Jack in the Box’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.

Is Jack in the Box’s Balance Sheet Risky?

As Jack in the Box has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA is a measure of a company’s total debt. Net interest cover measures the ability to meet interest payments on debt. Essentially we check that a) a company does not have too much debt, and b) that it can afford to pay the interest. Jack in the Box is carrying net debt of 4.05 times its EBITDA, which is getting towards the upper limit of our comfort range on a dividend stock that the investor hopes will endure a wide range of economic circumstances.

Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. Interest cover of less than 5x its interest expense is starting to become a concern for Jack in the Box, and be aware that lenders may place additional restrictions on the company as well.

Consider getting our latest analysis on Jack in the Box’s financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Jack in the Box has been paying a dividend for the past five years. During the past five-year period, the first annual payment was US$0.80 in 2014, compared to US$1.60 last year. Dividends per share have grown at approximately 15% per year over this time.

The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it’s also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient’s purchasing power. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Jack in the Box has grown its earnings per share at 19% per annum over the past five years. A company paying out less than a quarter of its earnings as dividends, and growing earnings at more than 10% per annum, looks to be right in the cusp of its growth phase. At the right price, we might be interested.

Conclusion

To summarise, shareholders should always check that Jack in the Box’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Jack in the Box has low and conservative payout ratios. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we’d like. Overall we think Jack in the Box scores well on our analysis. It’s not quite perfect, but we’d definitely be keen to take a closer look.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 15 Jack in the Box analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.