After the market closed on Thursday, June 30, Wingstop (NASDAQ: WING), the burgeoning chicken-wing franchise, declared a $2.90 per-share special dividend. Based on the closing price that day, $27.25, the Wingstop special dividend produced a 10.6% yield.
That’s a lot of money to earmark for a special dividend. The question is, was it an appropriate use of company capital?
At the time, I thought that it was an appropriate use. Wingstop was on a nice growth trajectory. You could even call it a Goldilocks trajectory: not too fast, not too slow, but just right.
Since 2012, Wingstop revenue had increased at a 15% average annual rate. Over the same period, operating earnings had outdone revenue growth by a factor of two. Operating earnings had increased at a 30% average annual rate.
When operating earnings grow faster than revenue, operating efficiency is usually on the rise. Such was the case with Wingstop. Margins – gross and operating – were trending higher.
All signs pointed to sustained growth. Wingstop was on track to achieve its targeted range of 125 to 135 net new-store openings in 2016. By year-end, the company should have close to 1,000 restaurants worldwide.
But it’s unhealthy to grow through expansion alone. The existing restaurants must grow as well. On this front, Wingstop’s existing restaurants were growing. In the first quarter, same-store sales grew 4.6% year over year.
Persistent growth allowed management to raise its 2016 revenue estimate to between $89 million and $90 million – a 15% increase over 2015 revenue. More important, EPS guidance had been raised to $0.55 and $0.57 per share. EPS should grow 58% year over year.
But if a company is in growth mode, why pay a special dividend? Isn’t the better strategy to reinvest all available cash in the business?
Investment returns comprise more than price appreciation. Dividends are a variable in the return equation. In fact, dividends are the key variable of investment value. Every investment – dividend paying or not – is valued based on the present value of future cash flows, namely dividends, even if those cash flows are nonexistent at that time.
Besides, dividends and growth need not be mutually exclusive. If you can afford to pay dividends and retain enough cash to smartly grow the business, there’s no reason not to do both. The great value investor Benjamin Graham emphasized this approach to investing analysis 70 years ago: Maximize shareholder value by intelligently growing the company and returning excess cash to shareholders.
Weighing the Wingstop Special Dividend
As for Wingstop’s special dividend, it was funded partly by a new $180 million senior secured debt facility along with available cash on hand. Investors could take solace in knowing that Wells Fargo (NYSE: WFC) funded the new facility, and that Wells Fargo was onboard with the special dividend.
I would normally balk at the idea of using loan proceeds to pay a special dividend. I didn’t balk with Wingstop. Refinancing existing debt and paying a special dividend payment still left a reasonable debt-to-equity ratio – at around 20% – that was standard within the industry. But it was Wingstop’s business model – growth through high-margin franchised restaurants – that supported the special dividend and would lead to future shareholder value.
So what did I do? I recommended that Dividend Confidential readers consider a Wingstop trade. I recommended they capture the Wingstop special dividend, and then capture the subsequent price appreciation I expected to occur after the price was adjusted lower by the special dividend on the ex-dividend date.
Less than a month after Wingstop shares traded ex-dividend, price appreciation indeed occurred. Wingstop shares took flight, rising nearly $3.50. The company reported financial results that exceeded nearly all estimates. Wingstop’s special dividend really did signal better days ahead.
Special Dividends: Choose the Right One
But not all special dividends signal better days ahead. Indeed, most special dividends signal nothing more than a sugar junkie’s high. The share price rises and then crashes. To profit from a special-dividend trade, you need to know which special dividends to trade.
Few investors are aware that the right special dividend – like the Wingstop special dividend – can present an exceptional investment opportunity. It can generate returns that go beyond the immediate special-dividend payment.
If you’re interested in learning more about the right special dividends and their high-return potential, click here to receive a detailed report on a unique investment strategy to generate superior returns with special dividends.