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The fast food industry is a natural source of dividend stocks. By and large, fast food operators enjoy the benefits of scale, customer loyalty, and recession-resistant business models.

The strong cash flow generated by fast food stocks often translates into dividend payments for shareholders.

For example, Wendy’s Company (WEN) has a high current yield of 5.4%.

In this article, we will analyze the prospects of Wendy’s stock.

Business Overview

Wendy’s is the second largest hamburger quick-service restaurant chain in the U.S. with over 7,000 restaurant locations globally. The company was founded in 1969 in Columbus, Ohio.

More than 90% of the company’s locations are in the United States.

On May 2nd, 2024, Wendy’s reported first quarter 2024 results for the period ending March 31st, 2024. The company’s global system-wide sales growth equaled 2.6% compared to growth of 10.0% in first quarter 2023.

Global same restaurant sales growth of 0.9% compared unfavorably to 8.0% in the same prior year period. System-wide sales of $3.45 billion was 2.5% higher than $$3.36 billion earned in first quarter of 2023.

Source: Investor Presentation

Out of the 35 total new restaurant openings in the first quarter, the company saw just 8 net new restaurants, which compares favorably to last year’s zero net new restaurants on 39 gross new restaurants.

The U.S. saw 2 net new restaurants closed, while 10 net new restaurants were international. The global reimaging of Wendy’s was reported to be 87% complete as of 1Q 2024 compared to 80% one year ago.

Adjusted revenues of $430 million for the quarter was up just 0.6% year-over-year, driven by an increases in franchise royalty revenue and advertising funds revenue. Adjusted earnings per share for Q1 2024 was 9.5% higher year-over year to $0.23.

Management reaffirmed its 2024 outlook for system-wide sales growth of 5% to 6%. Adjusted EPS is forecast in a range of $0.98 to $1.02. Additionally, the company expects free cash flow of around $285 million and capex of $95 million.

Growth Prospects

We expect Wendy’s to grow earnings-per-share by 12% annually over the next five years. Projected catalysts for this growth include double-digit net store count growth, medium-single digit same-store sales growth, and share repurchases.

Wendy’s has aggressively repurchased its shares in recent years. In the last five years, it has reduced its share count by 14%, and in the last nine years it has reduced it by 43%.

However, as Wendy’s has greatly increased its leverage in recent years, its share repurchases are likely to decelerate.

Still, the company repurchased 0.4 million shares for $7.2 million in Q1 2024, and has $299 million remaining under its share repurchase authorization.

Competitive Advantages

Wendy’s has a strong footprint in the U.S. fast food industry, and enjoys solid profit margins as a result. However, it operates in highly competitive industry.

As competition has only grown fiercer in the fast-food business in recent years, we believe the company has only a weak brand-based competitive advantage.

Wendy’s has a weaker brand than its primary competitor, McDonald’s. At the same time, newer concepts are threatening the legacy fast food operators in the U.S.

One clear benefit of the fast food business model is that it is highly resistant to recessions. Consumers often scale back their spending on dining when the economy enters a recession.

Dividend Analysis

On January 13th, 2023, Wendy’s announced a 100% increase of its quarterly dividend to $0.25 per share, although there have been no dividend increases since. Wendy’s management has been remarkably shareholder-friendly.

It has drastically reduced its share count in the last nine years and had raised the dividend for 10 years before the coronavirus pandemic ended the streak.

Still, the annualized payout of $1 per share provides a current yield of 5.4%.

However, Wendy’s debt level is a lingering concern for dividend investors. The aggressive share repurchases have taken a toll on Wendy’s balance sheet, which has become quite leveraged. The company is currently leveraged at 5.1x long term debt to trailing adjusted EBITDA.

Management last mentioned their leverage target to be in the range of 4.5x to 5.5x, which it is within. But the company’s interest expense consumed about 32% of operating profit in 2023, which drags on future earnings growth and could limit the ability to raise the dividend.

With a 2024 dividend payout ratio of approximately 100%, Wendy’s dividend is in danger if earnings stay flat or decline going forward.

Final Thoughts

Wendy’s is an entrenched fast-food restaurant and has positive growth catalysts, especially when it comes to global expansion.

That said, the company has a high level of debt, and the dividend payout takes up virtually all of the earnings. Therefore, Wendy’s is an attractive income stock, but it comes with an elevated level of risk.

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