When my son was in elementary school, he was on a robotics team that competed around the state. One of his favorite traditions with the team was stopping at Cracker Barrel (Nasdaq: CBRL) on the way home from tournaments.

It’s too bad the Poinciana Tazbots aren’t still together, because Cracker Barrel could use the extra business to help fund its 8% Dividend yield. Is the company serving up enough Chicken n’ Dumplins to continue to pay shareholders that strong of a dividend?

Free Cash Flow has been heading the wrong way since the initial rebound after the pandemic.

Even though revenue has increased every year since 2021, gross margins have slipped and operating margin has dropped dramatically, which has squeezed profits and – as a result – cash flow.

In fiscal 2023, which ended in July, Cracker Barrel’s free cash flow totaled $123.5 million. Meanwhile, it paid out $116.1 million in dividends for a too-high payout ratio of 94%.

In other words, for every dollar in cash flow that the company generated, it paid shareholders $0.94. Most of the time, I like to see a payout ratio of below 75%. That way, if free cash flow falls, the company can still afford its dividend.

That’s exactly what concerns me here.

In 2024, Cracker Barrel’s free cash flow is forecast to drop to $114.5 million. In the first two quarters of fiscal 2024, it has paid $58.3 million in dividends. If it pays the same amount over the next two quarters, its total amount paid in dividends will be greater than its free cash flow, which is something we never want to see.

Up until the pandemic, Cracker Barrel had done a good job of consistently raising the dividend. Starting in 2003, its total payout grew every year for nearly two decades, and the company also occasionally paid some big special dividends.

But when the pandemic hit, Cracker Barrel suspended its dividend for a year, beginning in the summer of 2020. When it resumed paying a dividend in August 2021, it lowered it from $1.30 per share to just $1.

In January 2022, the quarterly dividend was raised back to $1.30 per share, which is where it sits today.

With cash flow declining and the total dividend payout expected to exceed free cash flow, we have to consider Cracker Barrel’s dividend far less reliable than its meatloaf.

Dividend Safety Rating: D

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