by Dividend Growth Investor | September 7, 2013 7:00 am
McDonald’s (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants primarily in the United States, Europe, the Asia Pacific, the Middle East, and Africa. This dividend champion has paid dividends since 1976 and increased distributions on its common stock for 36 years in a row.
The company’s last dividend increase was in September 2012 when the Board of Directors approved a 10% increase to 77 cents per share. The company’s largest competitors include Yum Brands (YUM), Starbucks (SBUX) and Burger King (BKW).
Over the past decade this dividend growth stock has delivered an annualized total return of 19.50% to its shareholders.
The company has managed to an impressive increase in annual EPS growth since 2003. Earnings per share have risen by 18.30% per year. Analysts expect McDonald’s to earn $5.60 per share in 2013 and $6.11 per share in 2013. In comparison McDonald’s earned $5.36 per share in 2012.
The company’s international operations have fueled the strong growth in McDonald’s earnings over the past twenty years. Despite the fact that a little over half of the company’s profits are derived internationally, this segment could continue to deliver solid performance in the future.
Another factor fueling the company’s growth and maintenance of its edge against competitors and other threats has been its ability to innovate in its menu and reinvent itself in order to win.
Some examples of that include the addition of salads to its menu a few years ago, as well as the introductions of premium drinks for customers. Other examples include extending store hours as well as focusing on the core brands through disposition of Chipotle Mexican Grill (CMG). The company has also been able to focus on streamlining operations and focusing on same-store sales, rather than mindlessly expanding at all costs. However, it still plans on expanding store count, while also reimaging existing locations, in order to improve the customer experience.
McDonald’s growth targets include:
– Average annual sales growth of 3% to 5%
– Average annual operating income growth of 6% to 7%, and
– Return on incremental invested capital in the high teens
The company also has a strong brand name, which has also allowed it to pass on price hikes onto customers, who nevertheless are still perceiving it’s menu in the “value” category. As a result, inflationary pressures should not affect profitability by a wide margin.
The return on equity has expanded from 13.20% in 2003 to 36.80% in 2012. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 28.40% per year over the past decade, which is much higher than to the growth in EPS.
A 28% growth in distributions translates into the dividend payment doubling every two and a half years. If we look at historical data, going as far back as 1976 we see that McDonald’s has actually managed to double its dividend every three and a half years on average. I expect dividend growth to average 10% per year over the next decade.
The dividend payout ratio has increased from 34% in 2002 to 53.50% in 2012. The expansion in the payout ratio has enabled dividend growth to be faster than EPS growth over the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently, McDonald’s is attractively valued at 16.80 times earnings, yields 3.10% and has an adequately covered dividend.
Full Disclosure: Long MCD and YUM
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