The Wendy's Company (NASDAQ:WEN) will increase its dividend on the 15th of March to US$0.13. This takes the dividend yield to 2.0%, which shareholders will be pleased with.

Check out our latest analysis for Wendy's

Wendy's' Payment Has Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. The last dividend was quite easily covered by Wendy's' earnings. This means that a large portion of its earnings are being retained to grow the business.

Looking forward, earnings per share is forecast to rise by 6.5% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 55%, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

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. The dividend has gone from US$0.08 in 2012 to the most recent annual payment of US$0.48. This works out to be a compound annual growth rate (CAGR) of approximately 20% a year 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.

Wendy's May Find It Hard To Grow The Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. However, Wendy's has only grown its earnings per share at 4.1% per annum over the past five years. Wendy's is struggling to find viable investments, so it is returning more to shareholders. This isn't bad in itself, but unless earnings growth pick up we wouldn't expect dividends to grow either.

In Summary

In summary, it's great to see that the company can raise the dividend and keep it in a sustainable range. The payout ratio looks good, but unfortunately the company's dividend track record isn't stellar. Taking all of this into consideration, the dividend looks viable moving forward, but investors should be mindful that the company has pushed the boundaries of sustainability in the past and may do so again.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come across 2 warning signs for Wendy's you should be aware of, and 1 of them is potentially serious. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.