Nathan's Famous, Inc. (NASDAQ:NATH) is about to trade ex-dividend in the next 3 days. This means that investors who purchase shares on or after the 23rd of August will not receive the dividend, which will be paid on the 6th of September.
Nathan's Famous's next dividend payment will be US$0.35 per share, on the back of last year when the company paid a total of US$1.40 to shareholders. Last year's total dividend payments show that Nathan's Famous has a trailing yield of 2.2% on the current share price of $64.99. If you buy this business for its dividend, you should have an idea of whether Nathan's Famous's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Nathan's Famous paid out just 21% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Fortunately, it paid out only 37% of its free cash flow in the past year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Nathan's Famous's earnings have been skyrocketing, up 23% per annum for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.
Unfortunately Nathan's Famous has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.
The Bottom Line
Has Nathan's Famous got what it takes to maintain its dividend payments? Nathan's Famous has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. There's a lot to like about Nathan's Famous, and we would prioritise taking a closer look at it.
Keen to explore more data on Nathan's Famous's financial performance? Check out our visualisation of its historical revenue and earnings growth.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.