Global consumer stock McDonald’s unveils turnaround plan

McDonald’s, a high-dividend-paying multinational corporation, is trying to revive its results—as it always has. When it does, the shares will jump. Meanwhile, it also remains a buy for its high and rising dividends.

Global consumer stock McDonald’s (NYSE─MCD) has stumbled in recent years. In 2015, McDonald’s is expected to earn $4.85 a share (all figures in U.S. dollars). This would represent the least that it has earned since 2010. This year’s estimate is 12.6 per cent less than the hamburger chain’s peak earnings of $5.55 a share in 2013.

In fact, McDonald’s earnings per share would have been even worse without share buybacks. Its share count peaked at 1.27 billion shares in 2004. Since then, the company has repurchased over 24 per cent of its shares.

In 2015, McDonald’s sales are expected to come in around $25.8 billion. This, too, would mark the lowest level since 2010. This level of sales would represent a drop of 8.2 per cent from peak sales of $28.106 billion in 2013.

Turnaround plan receives tepid response

New president and chief executive officer Steve Easterbrook has presented the initial steps of his turnaround plan. The market was unimpressed. On May 4, the day that Mr. Easterbrook unveiled his plan, McDonald’s fell by 1.7 per cent, to $96.13 a share. We like some steps in the plan. We’re only lukewarm about another step.

McDonald’s remains a buy. Its yearly dividend of $3.40 a share yields an attractive 3.54 per cent and puts it among the top U.S. dividend stocks. This yield should grow in the years ahead. Indeed, McDonald’s has raised its dividend for 39 years in a row. This rising yield is likely to attract income-seeking investors. When McDonald’s fixes its problems—as it always has—the shares will likely jump.

McDonald’s plans to franchise 3,500 of its company-owned restaurants by the end of 2018. This step would raise the proportion of franchised restaurants to 90 per cent—up from 81 per cent today. We see several benefits flowing from this.

Grow sales, cut costs, and reward shareholders

First, it’s likely to promote entrepreneurialism and innovation. After all, franchisees are business people out to earn as much as they can. They’ll seek ways to increase their sales and same-store sales.

Second, McDonald’s expects to cut its general and administrative costs by about $300 million by the end of 2017. Mr. Easterbrook aims to reduce layers of management and to achieve less bureaucracy.

Third, chief administrative officer Pete Bensen says, “Our new, more heavily-franchised business model will generate more stable and predictable revenue and cash flow streams and will require a less resource-intensive support structure.”

A second step is to return more cash to shareholders. Specifically, it plans to return $8 to $9 billion this year. By the end of 2016, it aims to return $18 to $20 billion of cash to its shareholders. This reinforces McDonald’s strategy of raising its dividend every year. We would also like to see it pay ‘special’ dividends rather than only buy back shares with excess cash. This could ‘unlock shareholder value’.

This global stock will segment its markets

The step we feel lukewarm about is the creation of four segments. Streamlined teams are supposed to support the segments. Mr. Easterbrook says “McDonald’s new structure will more closely align similar markets so they can better leverage their collective insights, energy and expertise.”

One segment is International Lead Markets. These established markets include Canada, Australia, France, Germany and Britain. They generated 40 per cent of McDonald’s 2014 operating income.

A second segment is High-Growth Markets with more potential for restaurant expansion and franchising. They include China, Italy, Poland, Russia, South Korea, Spain, Switzerland and Holland. They produced 10 per cent McDonald’s operating income.

A third segment is the U.S. By accounting for more than 40 per cent of McDonald’s 2014 operating income, the U.S. is the company’s largest segment.

McDonald’s Corp. remains a top U.S. dividend stock to buy for attractive and rising dividends while you wait for long-term share price gains.

 

The Investment Reporter, MPL Communications Inc.
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