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 1.12%) 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.
