Recently, Wingstop (WING 2.83%) announced it would be rewarding investors with a special cash dividend worth $4 per share. The payment will be the fifth time in the past six years that the chicken wing chain has paid a special dividend. Yet, this particular dividend comes when the company is at a crossroads. Here's why the special dividend may not be a good idea.
When will the special cash dividend occur?
If you own Wingstop stock on March 24, you'll receive your $4 dividend payment on April 7. The roughly $120 million payment will come from a newly secured loan of $250 million at a roughly 3.7% annual interest rate. The dividend yield for the special dividend is over 3%. The company noted 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 to take out loans to pay for it isn't without risk. Even before Wingstop added the $250 million loan, it already had roughly $469 million in long-term net debt. Wingstop has a history of recapitalizing, in which it pays off old loans with new loans with better terms.
Still, its long-term net debt has ballooned 652% since its IPO in 2015. For comparison, Wingstop's total revenue and net income 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 on taking the same role at Salad and Go, a fast-casual gourmet salad restaurant. While CEOs leave companies for various reasons, it's rare that one leaves for a smaller business like Salad and Go, which has 47 locations in two states, compared to Wingstop's 1,731 worldwide locations.
Wingstop's chief operating officer, Michael Skipworth, who has been with the company since 2014, was announced as Morrison's successor and assumed full responsibilities as of March 14. "I cannot think of a better person to serve as Wingstop's president and CEO," Morrison said about Skipworth.
Lofty expansion plans
Skipworth will have his work cut out for him since the company's long-term plans include 4,000 domestic and 3,000 international units -- representing a 300% increase from its current total count. Furthermore, Wingstop faces unprecedented inflation prices for its core product: chicken wings. Management has attempted to alleviate costs by adding chicken thighs to its menu, allowing the company to buy the entire bird instead of just purchasing the wings and some breast meat.
Whether Wingstop's new CEO will be successful is yet to be determined. But under Skipworth's tenure as COO, the stock is up roughly 530% since its IPO in 2015, compared to the S&P 500's return of about 110% during the same time period.
What is Wingstop's outlook after the special cash dividend?
Investors may be overlooking Wingstop as a top dividend stock, since its quarterly payout yields about 0.56%, which is considered a low yield. However, investors who have held shares since Wingstop's IPO have reaped the rewards. This upcoming $4 dividend will mean the company has paid $19.80 in dividends since going public, which is higher than its IPO price of $19 per share.
Beyond Wingstop's special cash dividend, look to see how its new CEO manages its growing debt and store expansion. Long-term investors may want to wait to see Wingstop show promise in those areas before taking a bite out of its stock.
