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The Wendy's Company (NASDAQ:WEN) will increase its dividend on the 15th of September to US$0.12. Based on the announced payment, the dividend yield for the company will be 1.6%, which is fairly typical for the industry.
Wendy's' Earnings Easily Cover the Distributions
While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. However, prior to this announcement, Wendy's' dividend was comfortably covered by both cash flow and earnings. As a result, a large proportion of what it earned was being reinvested back into the business.
Looking forward, earnings per share is forecast to rise by 6.1% over the next year. If the dividend continues on this path, the payout ratio could be 47% by next year, which we think can be pretty sustainable going forward.
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2011, the dividend has gone from US$0.08 to US$0.48. This means that it has been growing its distributions at 20% per annum over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.
The Dividend Has Growth Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Wendy's has impressed us by growing EPS at 8.9% per year over the past five years. Wendy's definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.
We Really Like Wendy's' Dividend
In summary, it is always positive to see the dividend being increased, and we are particularly pleased with its overall sustainability. The company is easily earning enough to cover its dividend payments and it is great to see that these earnings are being translated into cash flow. All of these factors considered, we think this has solid potential as a dividend stock.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come across 2 warning signs for Wendy's you should be aware of, and 1 of them is significant. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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.
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