Read This Before Considering The Cheesecake Factory Incorporated (NASDAQ:CAKE) For Its Upcoming US$0.27 Dividend (2024)

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see The Cheesecake Factory Incorporated (NASDAQ:CAKE) is about to trade ex-dividend in the next 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Therefore, if you purchase Cheesecake Factory's shares on or after the 14th of August, you won't be eligible to receive the dividend, when it is paid on the 27th of August.

The company's next dividend payment will be US$0.27 per share, on the back of last year when the company paid a total of US$1.08 to shareholders. Calculating the last year's worth of payments shows that Cheesecake Factory has a trailing yield of 3.0% on the current share price of US$35.74. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Cheesecake Factory

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Cheesecake Factory paid out a comfortable 44% of its profit last year. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. The company paid out 98% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

While Cheesecake Factory's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Cheesecake Factory to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that Cheesecake Factory's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Cheesecake Factory has lifted its dividend by approximately 6.8% a year on average.

Final Takeaway

Has Cheesecake Factory got what it takes to maintain its dividend payments? Earnings per share have been effectively flat over this time, and Cheesecake Factory's paying out less than half its profits and 98% of its cash flow. It's not common to see a company paying out a limited amount of its profits yet a substantially higher percentage of its cash flow, so we'd flag this as a concern. To summarise, Cheesecake Factory looks okay on this analysis, although it doesn't appear a stand-out opportunity.

So if you want to do more digging on Cheesecake Factory, you'll find it worthwhile knowing the risks that this stock faces. For example - Cheesecake Factory has 3 warning signs we think you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.