Nathan’s Famous Pays $25 Special Dividend
Normally dividend payouts are $1 to $2 payouts to shareholders as an enticement to stay each quarter and add yield to stock performance.
In the case of Nathan’s Famous (NATH) , though, they are paying shareholders $25 per share – which is about 30% of the company’s value. Now this is either insane, or it shows incredible confidence in future sales.
I can tell you, the company’s management is not insane. Over the past four quarters, Nathan’s Famous generated $96.1 million in revenue, an adjusted EBITDA of $20.2 million and free cash flow of $14 million. Roughly $116 million of the Nathan’s Famous junk bond offering will be used for the special dividend, in addition to cash on hand. The recent moves by the company are so adroit that one would think a Harvard-educated hedge fund manager is guiding the decision making at the company. Not only do they make a great hot dog, they take care of anyone who chooses to invest in shares.
In March of 2014, Nathan’s Famous renegotiated its licensing agreement with Smithfield, more than doubling its royalty on hot dog sales to 10.8%, significantly increasing its earnings profile according to Gabelli & Co. In 2014, the company sold nearly half a billion hot dogs, and was ranked as the 22nd Best Small Company in America by Forbes. They also own the Arthur Treachers brand.
Shares are not without volatility, and if you look back to January, shares were at $80 traveling from $30 just two years earlier. This was an equitable way to reward shareholders with a payout event – and let’s not forget that the company repurchased its own shares at the $20 level in 2008.
Nathan’s Famous does not have a hoard of outstanding shares available, nor does it have a tremendous amount of liquidity, but it has outperformed the Russell 2000 by 6x over a five-year period, which keeps small cap fund managers involved.
Nathan’s Road to Fame
Founded by Polish immigrant Nathan Handwerker in 1916 out of a Coney Island storefront, Nathan’s Famous has grown globally into the most recognizable hot dog brand in the world. While some 20th century meat concoctions like SPAM have fluctuated in popularity, Nathan’s Famous hot dogs have remained appealing over many generations, and today, they’re a hallmark of baseball stadiums and summer barbecues.
Investors rarely spend enough time understanding the inner workings of the business they invest in, and in the case of Nathan’s, it is critical to look beyond the brand to understand how and where to find the return on capital.
Nathan’s Famous still operates its iconic Coney Island eatery, where it hosts a hot dog-eating contest every Fourth of July. However, the company’s impressive margins are mostly the result of selling its hot dogs through food service giant Smithfield Foods Inc. (SFD) and other high-margin businesses such as brand licensing and franchised stores.
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