Dividend Aristocrats

McDonald’s Stock, a 40 Year Dividend Aristocrat

McDonald’s Stock is a member of the elite S&P 500 Dividend Aristocrats index. The aristocrats, as they are known, are stocks that have raised their dividend payment to investors for at least 25 consecutive years. Hence, they are some of the best dividend growth stocks you will find anywhere. McDonald’s has raised dividends for an impressive 40 consecutive years and is counting its 41st milestone this year.

Management last raised its dividend by 8% from $1.16 per share in September 2019 to $1.25 per share in December 2019. McDonald’s has grown dividends at a compounded annual growth rate (CAGR) of 8% over the last 5 years.

In this article, we will explore McDonald’s business operations worldwide, latest earnings, dividend payments and growth history, long term stock performance and current valuation versus the S&P 500 and Consumer Discretionary (XLY) index.

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

McDonald’s operates 38,695 owned and franchised restaurants in 119 countries around the world serving locally relevant quality food items and beverages. 93% of all restaurants are franchised with independent owners who take care of their business and be their own boss.

They make hiring decisions, and control marketing and pricing. The advantage of being a McDonald’s franchisee is the immensely powerful global recognition of the brand, operating system, know-how and financial resources.

Some of the top selling food items across the world include hamburgers and cheeseburgers including the Big Mac, Filet-O-Fish, Chicken McNuggets, Wraps, Salads, desserts, sundaes, coffee and smoothies. Most McDonald’s restaurants also offer breakfast menu items including Egg or Sausage McMuffins, bagel sandwiches, hotcakes and biscuits.

McDonald’s earns revenues from franchisees in the form of rent and royalties based on a percentage of sales. The opening of a new restaurant also generates initial fees allowing the company to earn predictable levels of cash flow each year.

McDonald’s generated $21.077 billion in sales for 2019. The screenshot below shows total revenues generated in the United States equaled $7.84 billion in 2019 and $11.4 billion in international markets. This means 37% of McDonald’s sales are generated in the United States and the remaining 63% are generated in international markets.

In order to grow sales worldwide, management has embarked on a Velocity Growth Plan. This plan encompasses McDonald’s 3 main core competencies including quality food, price value and customer experience. The company aims to be a part of peoples’ memories and lives including hosting birthday parties, night outs with friends or family dinners.

The company is also offering delivery to its customers who order through the McDonald’s app. In fact, delivery now represents 10% of all revenues generated by restaurants that offer this feature. This initiative is surely set to grow as more people order food from the comfort of their homes and make payment online.

As a matter of fact, McDonald’s global delivery business now totals $4 billion in system wide sales in 2019 across all franchisees and company owned stores. This is a 400% growth from 2016’s delivery sales of $1 billion across the system.

Revenue Analysis and Share Repurchases

For full year 2019, McDonald’s generated $21.077 billion in revenues and earned a net income of $6.025 billion. This implies a net profit margin of almost 29% which is a very strong margin to achieve. Operating income stood at $9.069 billion and operating margin equaled 43%.

Over the last decade, revenues have declined from $22.745 billion in 2010 to $21.077 billion in 2019. The reason for the decline is a restructuring initiative launched in 2015 when the company franchised 3,500 restaurants bringing its total number of franchised restaurants to 90% from 81% previously. This means revenues are now recorded by the franchise owners and not McDonalds’s however the company earns royalties and rent payments from each store.

Trading on the New York Stock Exchange, McDonald’s Stock has a market capitalization of $146.6 billion and pays a 2.5% dividend yield. This yield is about 50 basis points than the yield provided by the S&P 500 index at 2%.

Comparable same store sales increased by 5% in the United States thanks to strong promotional activity, Restaurant Experience of the Future and price increases. McDonald’s has rolled out Experience of the Future initiative where thousands of stores are remodelled to give them a “digital” look of the future.

Things that stand out include digital kiosks, friendly cashiers serving food right to your table and customizable meals based on customers’ preferences.

Comparable same store sales increased by 6.1% in international markets particularly the UK and France. McDonald’s system wide sales grew by 4% to $100.2 billion. Remember, this number is sales generated by all of McDonald’s franchisees and company owned stores. Since McDonald’s earns royalties off these sales, the higher the growth in this number, the more McDonald’s earns in revenues.

Soure: 2019 Investors Annual Report

2019 was a milestone year for McDonald’s because management paid $8.1 billion to shareholders in the form of dividends and share repurchases. Over the last 3 years, management has bought back $4.65 billion in share repurchases in 2017, $5.247 billion in 2018 and $4.98 billion in 2019.

Dividend payments have also been consistent at $3.089 billion in 2017, $3.256 billion in 2018 and $3.582 billion in 2019. The strength of the company’s business model, recurring royalties and rent payments allows the company to grow its dividend in the high single digits every single year while rewarding income investors. We really like this aspect of McDonald’s Stock and consider it a potential long term holding in any dividend or growth portfolio.

Growth Outlook

In 1st Quarter, 2020 earnings release, McDonald’s reported revenues of $4.714 billion and net income of $1.106 billion, implying a net profit margin of almost 24%. Revenues declined 6% year over year from 1st Quarter, 2019 of $5.024 billion. Management attributes this drop to restaurant closures due to Covid-19 virus, limited drive-thru operations in some restaurants and customer behaviour during this pandemic.

Global comparable sales dropped by 3.4% year over year, systemwide sales declined by 4% and diluted earnings per share dropped by 15%. Management has suspended its share repurchase program to conserve cash during this Covid-19 crisis, cut capital expenditures by $1 billion and took on new debt financing of $6.5 billion for working capital purposes.

Over the long term, management expects system wide sales growth between 3% to 4% annually, mid 40% operating margin and high single-digit earnings per share growth. Management expects to open 1,400 restaurants globally in 2020.

Dividend Growth History

McDonald’s is a member of the S&P 500 dividend aristocrats group, having raised its dividend for 40 consecutive years. Management has grown dividends from a modest 5 cents a share in 1990 to $4.73 as of 2019. This represents a stunning compounded annual growth rate (CAGR) of 17% over the last 30 years.

Attached chart shows a steep uptrend in McDonald’s dividend growth history since 1990. The effects of dividend growth and compounding really started to take off from 2003 when the uptrend line takes a steep turn higher.

Attached chart shows the year over year percentage growth in McDonald’s dividend payments over the last 30 years. As mentioned above, the dividend growth rate surged to 60% in 2003, almost 50% in 2006 and 2007 during the housing boom years in the United States. It is important to note that growth in the dividend has been volatile. During the technology bubble of 2001, the dividend growth rate shrunk to low single digits.

Measuring the Dividend Payout Ratio

Lets calculate the dividend payout ratio for McDonald’s. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In 2019, McDonald’s generated $8.1 billion in cash from operations and spent $2.4 billion in capital expenditures. What is the free cash flow?

Free Cash Flow = Cash from Operations – Capital Expenditures

Free Cash Flow = $8.1 billion – $2.4 billion

FCF = $5.7 billion

For fiscal 2019, McDonald’s paid out $3.58 billion in dividends. So what is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

Dividend Payout Ratio = $3.58 billion / $5.7 billion

DPR = 63%

A 63% dividend payout ratio means McDonald’s Stock is safe when paying dividends and management should have no difficulty in covering dividend payments. In fact, McDonald’s can grow the dividend for many years in to the future.

Remember, the company spent $2.4 billion in Capital Expenditures which seems like a huge sum of money. Since the company is investing for the future, results will pay off in the future as well.

Long Term Stock Performance

McDonald’s Stock has risen from a modest $9 in January 1990 to $197 as of June 2020. This represents a compounded annual growth rate of 11% over a period of 30 years. This is a very strong performance because the restaurants industry is cut throat competitive.

Stock Valuation

Bloomberg Analysts’ Consensus expects McDonald’s to earn $5.52 in earnings per share for 2020. Using the current stock price of $197 and dividing in to the expected earnings, we arrive at a forward price to earnings ratio of 35.6 times.

As a comparison, the S&P 500 currently trades at a forward PE of 22 times earnings. We believe McDonald’s stock is very expensive right now. However, a market pullback between 10% to 20% presents a significant buying opportunity for long term investors.

McDonald’s Stock is a member of the S&P 500 Consumer Discretionary index. This index trades at a forward price to earnings ratio of 19.2 times 2020 earnings. This means McDonald’s Stock trades at an elevated premium when compared to its peers in the Discretionary sector.

Executive Summary

Here is what we like and don’t like about McDonald’s Stock.

Likes

  • 40 years of growing dividends making this a dividend aristocrat stock.
  • Dividend payout ratio of 62%. This means McDonald’s dividend is quite safe and the payout can be raised in the future as capital expenditures decline. The company is investing heavily now to win customers through upgraded restaurants.
  • A decent dividend yield of 2.5% which is 50 basis points higher than the S&P 500 dividend.
  • A 5 year dividend growth rate of almost 8% which is very strong in the competitive restaurants industry.
  • Strong free cash flows every year that cover the dividend payments + share repurchases + capital expenditures.
  • A 5 year earnings per share growth rate of 10.5% which allows the company to beat analyst earnings’ estimates and grow the stock price.

Dislikes

  • Forward Price to Earnings Ratio of 35.6 times earnings making this a very expensive stock to own at current prices.
  • High debt load of $34.2 billion leaving the company highly exposed to interest rate changes and currency fluctuations.
Market Capitalization $146.6 Billion
Dividend Yield 2.5%
Forward PE Ratio 35.6 times 2020 earnings
Dividend Growth (5 Year Avg.) 8%
Dividend Payout Ratio 62%
EPS Growth (5 Year Avg.) 10.5%
2019 Revenues $21.077 Billion
Gross Margin 43%
Net Margin 29%

McDonald’s Stock Dividend Dates

Visit the company’s Investor Relations | Dividend History website to see a history of dividend payments, ex dividend dates and payable dates.

Record Date Payable Date Actual Dividend Amount
June 1, 2020 June 15, 2020 $1.25
March 2, 2020 March 16, 2020 $1.25
Total dividends 2020 $2.50
December 2, 2019 December 16, 2019 $1.25
September 3, 2019 September 17, 2019 $1.16
June 3, 2019 June 17, 2019 $1.16
March 1, 2019 March 15, 2019 $1.16
Total dividends 2019 $4.73
December 3, 2018 December 17, 2018 $1.16
September 4, 2018 September 18, 2018 $1.01
June 4, 2018 June 18, 2018 $1.01
Mar 1, 2018 Mar 15, 2018 $1.01
Total dividends 2018 $4.19
Dec 1, 2017 Dec 15, 2017 $1.01
Sep 1, 2017 Sep 18, 2017 $0.94
Jun 5, 2017 Jun 19, 2017 $0.94
Mar 1, 2017 Mar 15, 2017 $0.94
Total dividends 2017 $3.83
Dec 1, 2016 Dec 15, 2016 $0.94
Sep 1, 2016 Sep 16, 2016 $0.89
Jun 6, 2016 Jun 20, 2016 $0.89
Mar 1, 2016 Mar 15, 2016 $0.89

McDonald’s Stock Price

To view the latest quote on McDonald’s Stock Price, visit the company’s Investor Relations website and select “Stock Information.”

McDonald’s CEO Interview

Below is a video with the former CEO of McDonald’s, Steve Easterbrook who explains the evolution of McDonald’s store including digital kiosks, mobile ordering and food delivery through Uber Eats.

He explains how McDonald’s employees can spend less time behind the front counter, and more time in front of the counter through table delivery and food personalisation.

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