Blue Chips to Pass On: McDonald’s (MCD)
McDonald’s (MCD) is one of those companies that stands for American businesses that go global. MCD is ubiquitous, not just here in the U.S., but also as a brand around the rest of the world.
But the massive growth and reach of MCD is not actually a virtue anymore to investors. With about 35,000 locations in 120 countries there is not only a problem in finding new and profitable locations, but a serious problem in adding up enough new sites to significantly move the needle for MCD stock holders.
And let’s not forget that McDonald’s also remains the poster child for unhealthy eating, and that a focus on health and fresh ingredients at home and abroad could harm sales long-term. For some consumers, MCD will remain a purveyor of processed beef and greasy fries no matter how many healthy items the restaurant puts on the menu to change its image.
Case in point: Recent trouble with the top line that shows how hard it is to generate significant revenue growth for this entrenched fast food company. From fiscal 2011 to 2012, revenue grew just 2% or so, from a bit over $27 billion to just shy of $27.6 billion, according to S&P Capital IQ. Then from 2012 to 2013, revenue grew by that same meager 2%.
Across 2014? More of the same, with low single-digit growth predicted by analysts.
Now, MCD has been working to juice revenue through efficiencies and stock buybacks. The company has repurchased between $2.5 billion and $4 billion in stock annually since 2007, and is operating under a $10 billion buyback plan approved in 2012. But shareholders need to realize that it’s these buybacks fueling modest increases in earnings … not sales.
Now, MCD has a good history of dividend growth with payments that have soared 470% in 10 years to the $3.12 paid out all of last year. But the payout ratio is already more than half of 2014 earnings, so it’s unlikely that aggressive dividend growth will continue given the serious challenges to earnings and revenue growth.
If you own McDonald’s and have a great yield because your cost basis is around $30 or $40, good for you. But new money will get a 3.3% yield with little dividend growth in their future.