MCDONALD’S CORP. $164(New York symbol MCD; Income-Growth Dividend Payer Portfolio, Consumer sector; Shares outstanding: 810.0 million; Market cap: $132.8 billion; Dividend yield: 2.5%; Dividend Sustainability Rating: Highest; www.mcdonalds.com) is the world’s largest operator of fast-food restaurants, with 36,976 outlets in 120 countries. It serves a wide variety of food, but is best known for its hamburgers and french fries.
41 years of rising dividends
McDonald’s began paying dividends in 1976, and has increased the annual rate each year since then. That includes a recent 7.4% hike in the quarterly dividend. Starting in December 2017, investors will receive $1.01 a share, up from $0.94. The new annual rate of $4.04 yields 2.5%.
The company’s sales rose 2.0%, from $27.6 billion in 2012 to $28.1 billion in 2013. Annual sales then fell to $27.4 billion in 2014, and to $24.6 billion by 2016.
McDonald’s earnings rose 2.2%, from $5.4 billion in 2012 to $5.6 billion in 2013. Due to fewer shares outstanding, earnings per share gained 3.5%, from $5.36 to $5.55. Overall earnings then fell to $4.8 billion in 2014, and by 2016 had slipped to $4.7 billion. However, per-share earnings over that time increased from $4.82 to $5.44.
In the quarter ended September 30, 2017, McDonald’s revenue fell 10.4%, to $5.75 billion from $6.42 billion a year earlier. That’s mainly because the company continues to transfer outlets to its franchisees. It aims to have franchisees operate 95% of its outlets, up from today’s 90%.
As part of its re-franchising plan, McDonald’s recently sold 80% of over 2,700 restaurants in China to a group led by a Chinese state-owned company. The buyers will act as the master franchisee for the next 20 years. It will also be responsible for maintaining these locations, and financing the opening of new stores. The company recorded an $850 million pre-tax gain on the transaction.
As a result, earnings in the quarter jumped 47.7%, to $1.9 billion from $1.3 billion. Due to fewer shares outstanding, per-share earnings rose 53.3%, to $2.32 from $1.50.
Focus on better service pays off
McDonald’s continues to fuel its growth by simplifying its menus, using automated kiosks to speed up service and introducing home delivery service.
As well, the company wants to make it easier for customers to order and pay with their smartphones. It expects to install mobile order and payment systems in 20,000 of its outlets by the end of 2017.
For all of 2017, McDonald’s expects to open 900 new restaurants. That includes 500 under developmental licences, where the franchisee is responsible for the construction and related costs. In all, the company plans to spend $1.7 billion this year. It will earmark one-third to new stores, and twothirds will go to the upgrade of existing locations.
McDonald’s sound balance sheet will let it continue to invest in new projects. Its long-term debt of $28.2 billion (as of June 30, 2017) is a moderate 21% of its market cap. It also held cash of $2.4 billion, or $2.95 a share.
The company’s earnings in 2017 should improve to $6.56 a share. The stock trades at 25.0 times that estimate. It’s an acceptable multiple in light of McDonald’s growth prospects and well-known brands.
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