Read This Before Buying J & J Snack Foods Corp. (NASDAQ:JJSF) For Its Dividend

Dividend paying stocks like J & J Snack Foods Corp. (NASDAQ:JJSF) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

While J & J Snack Foods's 1.4% dividend yield is not the highest, we think its lengthy payment history is quite interesting. There are a few simple ways to reduce the risks of buying J & J Snack Foods for its dividend, and we'll go through these below.

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Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. J & J Snack Foods paid out 1,438% of its profit as dividends, over the trailing twelve month period. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. J & J Snack Foods paid out 145% of its free cash flow last year, which we think is concerning if cash flows do not improve. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. As J & J Snack Foods' dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

While the above analysis focuses on dividends relative to a company's earnings, we do note J & J Snack Foods' strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on J & J Snack Foods' financial position here.

Dividend Volatility

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. J & J Snack Foods has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of 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 10-year period, the first annual payment was US$0.4 in 2011, compared to US$2.3 last year. Dividends per share have grown at approximately 18% per year over this time.

It's rare to find a company that has grown its dividends rapidly over 10 years and not had any notable cuts, but J & J Snack Foods has done it, which we really like.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. J & J Snack Foods' earnings per share have shrunk at 47% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

To summarise, shareholders should always check that J & J Snack Foods' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. J & J Snack Foods paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Second, earnings per share have actually shrunk, but at least the dividends have been relatively stable. Using these criteria, J & J Snack Foods looks quite suboptimal from a dividend investment perspective.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 3 warning signs for J & J Snack Foods that investors should know about before committing capital to this stock.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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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. 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.
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