Wendy's (NASDAQ:WEN) Is Due To Pay A Dividend Of $0.25

The board of The Wendy's Company (NASDAQ:WEN) has announced that it will pay a dividend of $0.25 per share on the 16th of December. This means the annual payment is 5.5% of the current stock price, which is above the average for the industry.

View our latest analysis for Wendy's

Wendy's' Payment Could Potentially Have Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Based on the last payment, Wendy's' profits didn't cover the dividend, but the company was generating enough cash instead. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.

EPS is set to grow by 36.9% over the next year. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 89% - on the higher side, but we wouldn't necessarily say this is unsustainable.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2014, the dividend has gone from $0.20 total annually to $1.00. This implies that the company grew its distributions at a yearly rate of about 17% over that duration. Wendy's has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

Dividend Growth Could Be Constrained

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. We are encouraged to see that Wendy's has grown earnings per share at 11% per year over the past five years. Although per-share earnings are growing at a credible rate, the massive payout ratio may limit growth in the company's future dividend payments.

Our Thoughts On Wendy's' Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Wendy's' payments, as there could be some issues with sustaining them into the future. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. To that end, Wendy's has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about. Is Wendy's not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.