The Wendy’s Company (WEN) cut its dividend because of intense competition, leverage, inflation, and a stressed customer. Additionally, changing economic and business conditions have created uncertainty for the restaurant chain. Systemwide and organic sales growth are now negative. The firm reduced its dividend during the pandemic in fiscal year 2020 and increased it in 2021 and 2022, but it was constant for nine quarters.
The share price has fallen dramatically since 2022. Investors sold this dividend stock because of worries about the economy, poor results, and a possible dividend cut as safety decreased. Depending on economic conditions and earnings results, another reduction may occur in the future.
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Overview of The Wendy’s Company
The Wendy’s Company was founded in Ohio in 1969 by Dave Thomas. He named the restaurant after one of his daughters. It is a global restaurant chain with approximately 7,308 locations. It is known for its square burgers in a round bun, baked potatoes, French fries, and other items. Today, it is the third largest hamburger fast-food chain after McDonald’s and Burger King. In 2024, Wendy’s systemwide sales were $14.5 billion.
Total revenue was $2,246 million in the fiscal year 2024 and $2,235 million in the past twelve months.
Dividend Cut Announcement
During the first quarter fiscal 2025 results announcement on Friday, May 2nd, Wendy’s Companies (WEN) cut its dividend. The company’s quarterly dividend rate was $0.25 per share before the announcement. The dividend is now $0.14 per share, a 44% reduction. In the quarterly results on May 2nd, the announcement stated,
“The Company announced today the declaration of its regular quarterly cash dividend of $0.14 per share. The dividend is payable on June 16, 2025, to shareholders of record as of June 2, 2025.”
Later, in the earnings call transcript, the company’s CFO stated,
“Our second priority is paying an attractive dividend. In line with our capital allocation policy, today, we announced our second quarter dividend payment of $0.14 per share. Our next priority is maintaining a strong balance sheet. We ended the first quarter with over $335 million of unrestricted cash on the balance sheet and a net leverage ratio of 4.5 times. This includes the impact of the share repurchases during the first quarter. Finally, we believe cash belongs to our shareholders and we will use share repurchases to return excess cash to shareholders.”
Effect of the Change
Although the company did not call attention to the dividend cut, by executing a 44% dividend cut, Wendy’s sought to reduce its dividend to provide financial flexibility because of a challenging economic environment. The firm is experiencing a decline in systemwide sales and is impacted by inflation. Furthermore, the firm forecasts weak systemwide and organic sales growth in fiscal 2025. The company’s dividend rate has been constant since Q1 2023, so it did not have a streak. The result is less free cash flow is required for the dividend payout, allowing the fast food restaurant chain to focus on strategic priorities, store expansion, and reduce debt.
Challenges
Wendy’s is facing a challenging economic environment globally because of financial uncertainty in its primary market, the United States, leverage, inflation, and intense competition. A stressed customer is also affecting results.
Economic Uncertainty
The American economy ended 2024 with significant optimism and momentum. However, the ad hoc implementation of tariffs and their uncertain nature has affected consumer and business confidence. Moreover, no one really knows the level of tariffs in the future. This lack of stability has resulted in significant economic and business uncertainty.
Competition
Wendy’s faces significant competition from fast-food customers. The space is dominated by McDonald’s, which is an order of magnitude larger than Wendy’s. Burger King is also bigger. In addition, many other hamburger chains and local restaurants exist. As the third largest hamburger fast-food chain, Wendy’s lacks its larger competitors’ scale, locations, and customer base.
Debt and Leverage
Wendy’s is a leveraged firm. It currently has roughly 2.4X interest coverage and about a 7.0X leverage ratio. Its credit rating of B+/B3 reflects these values, a highly speculative grade.
Inflation and Stressed Consumers
Inflation remains a primary concern of retailers. Cost of goods inflation had stabilized but may be rising again. Inflation impacts margins because not all costs can be passed to customers immediately. Additionally, labor inflation remains higher than usual, placing upward pressure on wages. Low unemployment has made finding inexpensive labor difficult.
Dividend Safety
Despite generally rising revenue and earnings per share (“EPS”), Wendy’s dividend safety was low because of poor safety metrics. Earnings per share exhibited a rising trend and peaked in fiscal year (FY) 2024 at $1.00. However, it was flat in 2019 and lower in 2020 because of the pandemic. Earnings per share are expected to decrease to $0.96 per share in FY 2025.
As seen in the chart below from Portfolio Insight*, the dividend yield climbed rapidly to over 8%. This value and the rapid rise indicate poor operating results. It was much greater than the 5-year average of 3.48%. After reducing the dividend by approximately 44%, the estimated dividend yield is around 4.57% now. The quarterly rate is $0.14 per share. However, the yield is still appreciably higher than that of the S&P 500 average.
The annual dividend now requires about $107.5 million ($0.56 yearly dividend x 192 million shares), compared to $204.4 million in FY 2024. In addition, based on consensus 2025 estimates of $0.56, the estimated payout ratio will be around 58%. We expect the annual difference in cash flow requirements to enhance liquidity allowing the firm to accelerate global unit growth and improve operations.
Although the dividend is in a better position and more secure now, the firm’s dividend is not entirely safe. Poor operating results or persistent inflation may force another dividend cut. Also, Wendy’s receives a B+/B3 highly speculative grade from the credit rating agencies.
In addition, the restaurant firm receives a dividend quality grade of ‘D’ from Portfolio Insight. Hence, Wendy’s is in the 30th percentile of dividend stocks tracked. We view the equity as at risk for another dividend cut unless the results improve.
Final Thoughts on the Wendy’s (WEN) Dividend Cut
Before the pandemic, Wendy’s was a dividend growth stock, increasing the annual dividend. However, COVID-19 interrupted the streak and reduced the payout in FY 2020. The distribution was increased in FY 2021 and 2022 before being held constant since 2023. However, economic uncertainty, competition, leverage, inflation, and a stressed customer have created significant challenges for the restaurant chain. The dividend safety metrics were relatively poor. As a result, Wendy’s cut its dividend. However, we view the firm as at risk for another reduction.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.