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The Ratings Game: Wendy’s new capital allocation strategy leaves room for upside, could reduce debt

Wendy’s new capital allocation strategy leaves room for upside, and could reduce the fast food restaurant chain’s debt, say analysts.

On Friday Wendy’s Co. gave upbeat fourth-quarter guidance and its board doubled the company’s quarterly dividend to 25 cents a share. The board also approved a new $500 million share-repurchase authorization and announced an organizational restructuring. 

Also on Friday, Nelson Peltz’s Trian Fund Management said it will not pursue a takeover of Wendy’s. Peltz is Wendy’s non-executive chairman, as well as CEO of Trian Fund Management, which is Wendy’s largest shareholder. Last year Trian, which owns 19.4% of the company’s shares, pushed for a possible sale of Wendy’s.

See Now: Wendy’s stock climbs on upbeat fourth-quarter guidance, dividend hike

Citing Wendy’s same-store sales momentum, expected margin expansion following the company’s reorganization, and Trian’s announcement, Truist Securities increased its Wendy’s price target to $28 from $27.

The company’s announced return of cash to shareholders appears conservative, leaving room for upside, according to Truist analyst Jake Bartlett in a note released Monday. “We continue to expect accelerating development, despite NT pressure,” he added.

Stifel also raised its Wendy’s price target to $22 from $20 on Monday. “Historically, the company has returned more capital through share repurchases than dividends; however, the new capital plan has likely shifted that strategy,” wrote Stifel analyst Chris O’Cull. “Although the large dividend and likely annual increases theoretically reduce the company’s financial flexibility, we do not expect the cash balance to fall quickly due to these actions and believe the company could use a portion of excess cash to reduce debt.”

Related: Nelson Peltz’s hedge fund Trian won’t make bid for Wendy’s, backs new capital allocation strategy

Wendy’s stock has fallen 1.6% over the last 12 months, compared with the S&P 500 Index’s
SPX,
-0.18%

decline of 14.2%. The fast food chain’s stock fell 0.6% Tuesday, outpacing the S&P 500 Index’s gain of 0.04%.

Of 29 analysts surveyed by FactSet, 12 have an overweight or buy rating, 16 have a hold rating, and one has an underweight rating for Wendy’s.

Last week Trian Fund Management nominated Peltz for the Walt Disney Co.
DIS,
+0.95%

board. The hedge fund owns approximately 9.4 million common shares of Walt Disney, valued at approximately $900 million. In a filing on Tuesday Walt Disney brushed off the billionaire activist investor’s bid for a board seat, dismissing his lack of “skills and experience.”

Additional reporting by Jon Swartz.

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