Wendy’s stock still yields more than 5%.
A dividend cut can sometimes be a good thing for investors and the underlying stock. When a company continues to pay a dividend that investors suspect is unsustainable, it can make them wary of investing in the business, fearing that a cut may be inevitable. And it also raises questions about whether management is making the best decisions for shareholders by clinging to a high payout.
No CEO wants to cut a dividend, but sometimes it’s the necessary thing to do. Fast-food company Wendy’s (WEN -2.48%) recently slashed its dividend by a staggering 44%. But despite the steep cut, the stock still offers a fairly high yield, well above the S&P 500 average of 1.2%.
With a potentially safer dividend, could Wendy’s make for an underrated income stock to buy right now?
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Is Wendy’s new dividend safe?
Earlier this year, Wendy’s reduced its quarterly dividend from $0.25 to just $0.14. It was a stock that I mentioned might be due for a cut this year given how low its earnings numbers were; they simply weren’t strong enough to suggest the payout was safe. Now, the stock is paying $0.56 per share to investors over the course of an entire year.
During the first three months of 2025, the company reported diluted earnings per share of $0.19, which was down by $0.01 year over year. If it were to maintain that level of profitability consistently in future quarters, then its payout ratio would be approximately 74% of earnings. That would certainly appear to be sustainable.
Are investors overreacting?
Entering trading this week, Wendy’s stock has declined by 35% since the start of the year. Not only has the dividend cut dissuaded investors, but underwhelming results have also been a cause for concern. The company’s sales were down during the March quarter and Wendy’s guidance calls for systemwide sales growth of between -2% and 0% for the full year.
WEN Operating Revenue (Quarterly YoY Growth) data by YCharts
As a result of the sell-off, the restaurant stock now trades at just 11 times its trailing earnings and it’s near its 52-week low. It’s a dirt cheap valuation when you consider the average stock in the S&P 500 trades at a multiple of 25.
Should you buy Wendy’s stock today?
There’s been a lot of bad news around Wendy’s stock lately but I’m going to take the unpopular opinion of saying that it’s a good buy. It’s still a top fast-food chain in the country, and rival chains have also struggled with growth recently.
And by addressing concerns about its dividend and decreasing the payout to a manageable level, it can reduce some of the worry income investors may have about the stock today. Unless the company’s financials drastically deteriorate, I don’t expect that another dividend cut will happen.
Meanwhile, if the yield — now standing at 5.2% — proves to be sustainable, this could be one of the better dividend stocks to own right now. Combine that with a low valuation, which gives the stock a good margin of safety, and I believe you could have yourself a good contrarian investment in Wendy’s with plenty of room to rise higher and the possibility to provide you with a lot of dividend income.
I do believe investors have overreacted and have been overly punitive on Wendy’s stock this year. But if you’re willing to be patient, I think this can make for a good investment to hang on to for the long haul. While the business may be struggling, it’s by no means broken.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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