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MCD Stock: Investors Shrug at McDonald’s Buyback Plans

Stock repurchases and dividend bumps are no substitute for growth


McDonald’s (MCD) Chief Executive Don Thompson’s is having almost as much difficulty winning over investors as he is diners.

mcdonald's-dividend-mcd-stockCase in point: this week’s olive branch to Wall Street.

Though Thompson promised to raise the company’s payout to shareholders by as much as 20% to $20 billion in the form of share buybacks and dividends, investors couldn’t care less. Shares of MCD company have slowly fallen for the past few days.

Wall Street had plenty of reasons to yawn at the company’s announcement, though, especially because Thompson was vague in his promises. For one thing, I am skeptical about the company’s enthusiasm for stock buybacks. The chain only purchased 18.7 million shares of MCD stock in 2013, at a cost of $1.8 billion — the least it has done since 2007, according to the company’s website. This makes no sense — McDonald’s stock, at least on paper, appears to be a bargain, making it a prime opportunity to buy back shares.

Of course, no shareholder is going to turn down a higher McDonald’s dividend. But McDonald’s dividend already offers a yield of 3.2%, which is far better than Burger King’s (BKW) 1.1%, Wendy’s (WEN) 2.4% and Yum Brand’s (YUM) 2%. Unless that dividend doubles, which seems unlikely, a bump in payout doesn’t make MCD stock look that much better.

McDonald’s plans to refranchise 1,500 restaurants outside the U.S. is a smart idea and should generate a decent amount of cash. But it’s not exactly groundbreaking. Both Burger King and Wendy’s undertook refranchisings last year. What took McDonald’s so long to catch-up to its rivals?

Though MCD stock trades at cheap price-to-earnings multiple of about 18 and comes with a sweet enough dividend, I just can’t recommend buying the stock. The company, which was known as innovator, now spends far too much time playing catch-up to its rivals. People might not lose much money buying MCD stock, but they won’t gain much either. Pundits keep waiting for MCD’s next big thing, and they are still waiting. They’ll be waiting for a long time.

The Real Problem for MCD Stock

Finally, all the fiscal gymnastics in the world don’t address the company’s core problem: people don’t like McDonald’s food. McDonald’s hasn’t had a hit product since Ronald McDonald graduated clown college. The last good idea that the chain had may have been McCafe from 2009, which in the fast-paced world of fast-food might as well be the Paleolithic era.

Ever since then, the company’s batting average for new products has been awful. Remember the Angus Third Pounder? No? Don’t feel bad, because few people ordered the high-priced menu item which was unceremoniously dropped last year. Though I like the Premium McWrap Chicken sandwiches, they aren’t exactly flying off the shelves, either, and neither are the variations on the Quarter Pounder introduced last year.

U.S. monthly same store sales did end their 5-month skid in April, but don’t pop the champagne corks just yet. The 1.2% gain was mainly the result of gains in China, where market leader Yum Brands is struggling to regain the trust of consumers spooked by concerns about the safety of the food at its KFC locations.

MCD Sales in the U.S. were flat, which is hardly better than being down. This has to be disheartening for McDonald’s, which has been giving away free coffee to drive traffic. And the company might be in for even more pain, given the buzz generated by Taco Bell’s new breakfast menu and fierce competition from other rivals. Breakfast is both the fastest-growing and most profitable segment for many restaurant chains. If McDonald’s loses ground here, it’s in serious trouble.

If MCD is serious about its “Plan to Win,” it has a lot of work ahead of it. Franchisees are furious with the chain over increasing fees and a ballooning menu chock full of items that  few people order. Its customer service remains dismal. (I eat at McDonald’s more than I should, and my orders are messed up regularly.) The company’s drive-throughs are also the slowest in the quick service restaurant industry. Even more worrisome is that Millennials, a key demographic for fast-food operators, are avoiding the chain for healthier alternatives such as Chipolte (CMG).

While higher dividends and more stock buyback are nice, shareholders want to see McDonald’s post meaningful growth. But MCD stock seems unable to deliver.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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