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Readers hoping to buy Nathan's Famous, Inc. (NASDAQ:NATH) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Nathan's Famous' shares before the 18th of August to receive the dividend, which will be paid on the 1st of September.
The company's next dividend payment will be US$0.50 per share. Last year, in total, the company distributed US$2.00 to shareholders. Looking at the last 12 months of distributions, Nathan's Famous has a trailing yield of approximately 2.6% on its current stock price of $78. 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 check whether the dividend payments are covered, and if earnings are growing.
See our latest analysis for Nathan's Famous
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 39% 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. Fortunately, it paid out only 28% of its free cash flow in the past year.
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.
Click here to see how much of its profit Nathan's Famous paid out over the last 12 months.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Nathan's Famous's earnings have been skyrocketing, up 51% per annum for the past five years. Nathan's Famous is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.