Amid a fair bit of gloom surrounding the pub trade, things seem to be looking up for shareholders of J D Wetherspoon (LSE: JDW). The shares are up 58% so far this year. Despite that rise, Spoons’ boss Tim Martin spent well over £6m of his own money this month adding to his already substantial shareholding in the chain. And while the dividend remains suspended, I think it could be coming back soon.
Dividend history
First, a step back. Until the pandemic, Wetherspoons was a consistent dividend payer. In 2018 it paid a 12p per share annual dividend. At the current share price that would equate to a yield of 1.7%.
Past performance is not an indication of what happens next. But in this case it acts as a reminder that, historically, the company was able to generate large free cash flows and has shown itself willing to use them partly to fund shareholder payouts.
The dividend was cancelled during the pandemic, which hurt hospitality businesses badly. Even if it had wanted to pay a dividend, the company was restricted by covenants as part of a pandemic-era government loan scheme.
Improving performance
Spoons said it is keeping its dividend policy under review. It has not given any explicit suggestion that it plans to restart payouts. It is also unclear if the pandemic loan has now been repaid in full.
Presuming it has, however, I see grounds for optimism that the J D Wetherspoon dividend may restart.
I think that could be announced as early as next month, when the firm is due to announce its full-year results.
Why am I optimistic?
In July, the company updated the market on its performance. At that point, sales were 13% higher than in the previous year. Net debt in July was lower than it was going into the pandemic. The company expects to meet market expectations for its full-year financial performance.
In the first half alone, the company reported free cash flow of £167m.
That was driven by a one-off financial transaction. But it does mean that the company has generated substantial free cash.
At the full-year level, I expect it to be both profitable and free cash flow positive. That could help fund the reintroduction of a J D Wetherspoon dividend.
Onwards and upwards?
I am hopeful the directors could announce such a move next month, something that could signal renewed confidence to the market.
But whether or not it happens, I plan to hold my Spoons shares. Indeed, like Tim Martin I have been buying more this month.
The company has higher sales and lower net debt than before the pandemic. Yet the shares are still 46% cheaper than they were five years ago.
With a large estate, sizeable customer base, economies of scale and strong value offering, I think the business’s proven formula could continue to deliver.
High product cost inflation and a tight labour markes are threats to profitability. But as a long-term investor, I remain confident about the prospects for the shares.
