Is Wingstop’s special cash dividend a mistake?

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Recently, wing stop ( WING -0.07% ) announced that it would reward investors with a special cash dividend worth $4 per share. The payout will be the fifth time in the past six years that the chicken wing chain has paid out a special dividend. Yet this particular dividend comes when the company finds itself at a crossroads. Here’s why the special dividend might not be a good idea.

When will the special cash dividend take place?

If you own Wingstop stock on March 24, you will receive your $4 dividend payment on April 7. The payment of approximately $120 million will come from a newly secured loan of $250 million at an annual interest rate of approximately 3.7%. The dividend yield for the exceptional dividend is above 3%. The company said it plans to use the excess proceeds to “strengthen its liquidity position and for general corporate purposes.”

Image source: Wingstop.

While investors often welcome special cash dividends, Wingstop’s strategy of taking out debt to pay them is not without risk. Even before Wingstop added the $250 million loan, it already had about $469 million in long-term net debt. Wingstop has a history of recapitalization, in which it pays off old loans with new loans on better terms.

Yet its long-term net debt has increased 652% since its IPO in 2015. By comparison, Wingstop’s total revenue and net profit have increased 262% and 322%, respectively.

Meanwhile, Wingstop’s CEO resigns

Shortly after Wingstop announced its special cash dividend, CEO Charlie Morrison announced his resignation after 10 years with the company. Morrison plans to play the same role at Salad and Go, a casual, gourmet salad restaurant. As CEOs leave companies for a variety of reasons, it’s rare to leave for a small company like Salad and Go, which has 47 locations in two states, compared to Wingstop’s 1,731 global locations.

Wingstop chief operating officer Michael Skipworth, who has been with the company since 2014, was announced as Morrison’s successor and assumed full responsibility effective March 14. “I can’t think of a better person to fill the role of President and CEO of Wingstop,” Morrison said. about Skipworth.

Ambitious expansion plans

Skipworth will have its work cut out for it as the company’s long-term plans include 4,000 domestic units and 3,000 international units, representing a 300% increase from its current total number. Additionally, Wingstop faces unprecedented price inflation for its flagship product: chicken wings. Management tried to cut costs by adding chicken thighs to its menu, allowing the company to buy the whole bird instead of just buying the wings and some breast meat.

Whether Wingstop’s new CEO will succeed remains to be seen. But under Skipworth’s tenure as COO, the stock has risen about 530% since its IPO in 2015, compared to the S&P500around 110% over the same period.

What is Wingstop’s outlook after the special cash dividend?

Investors may overlook Wingstop as one of the top dividend-paying stocks, as its quarterly payout yields around 0.56%, which is considered a low yield. However, investors who had held shares since Wingstop’s IPO reaped the rewards. This upcoming $4 dividend will mean the company has paid out $19.80 in dividends since its IPO, which is higher than its IPO price of $19 per share.

Beyond Wingstop’s special cash dividend, watch how its new CEO handles its growing debt and expanding stores. Long-term investors may want to wait to see Wingstop show promise in these areas before taking a bite out of its stock.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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