Nathan's Famous, Inc. (NASDAQ:NATH) is about to trade ex-dividend in the next four days. If you purchase the stock on or after the 20th of November, you won't be eligible to receive this dividend, when it is paid on the 4th of December.
Nathan's Famous's next dividend payment will be US$0.35 per share, and in the last 12 months, the company paid a total of US$1.40 per share. Calculating the last year's worth of payments shows that Nathan's Famous has a trailing yield of 2.3% on the current share price of $60.19. 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 investigate whether Nathan's Famous can afford its dividend, and if the dividend could grow.
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. Fortunately Nathan's Famous's payout ratio is modest, at just 48% of profit. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Thankfully its dividend payments took up just 41% of the free cash flow it generated, which is a comfortable payout ratio.
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?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Nathan's Famous earnings per share are up 2.1% per annum over the last five years. Recent earnings growth has been limited. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, two years ago, Nathan's Famous has lifted its dividend by approximately 18% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
Is Nathan's Famous worth buying for its dividend? Earnings per share growth has been growing somewhat, and Nathan's Famous is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Nathan's Famous is halfway there. Nathan's Famous looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
In light of that, while Nathan's Famous has an appealing dividend, it's worth knowing the risks involved with this stock. To that end, you should learn about the 2 warning signs we've spotted with Nathan's Famous (including 1 which is concerning).
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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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