The dividends keep growing and “i’m lovin’ it”

McDonald’s global branding campaign based on the “i’m lovin’ it” slogan and song was clearly meant to promote the sale of its fast food products. But this dividend aristocrat’s shareholders must also have been singing along as the world-wide restaurant chain raised its dividend for the 39th year in a row.

McDonald’s Corp. (NYSE─MCD), one of our U.S. blue chip consumer stocks, is doing better these days. The world’s leading restaurant chain remains a buy for further long-term share price gains as well as attractive and growing dividends. It has raised its dividend for 39 years in a row. That’s why the company remains a ‘dividend aristocrat’ even under the more stringent U.S. requirement—rising dividends for at least 25 years.

In 2015, McDonald’s global comparable sales rose by 1.5 per cent. What’s more, comparable sales gains are on the upswing. In the fourth quarter, they climbed by five per cent. Rising comparable sales are a critical statistic. Without this, the company would find it more difficult to sustainably raise its earnings.

McDonald’s is doing even better in its home market. In the U.S., fourth-quarter comparable sales went up by 5.7 per cent. It credits the October launch of All Day Breakfast, which has proven popular. The company adds that “unseasonably mild weather” contributed to better comparable sales.

McDonald’s is now earning more

President and chief executive officer Steve Easterbrook said, “We took bold, urgent action in 2015 to reset the business and position McDonald’s to deliver sustained profitable growth. We ended the year with momentum, including positive comparable sales across all segments for both the quarter and the year.”

In 2015, McDonald’s reported earnings of $4.529 billion, or $4.80 a share. This was down by 0.4 per cent from $4.758 billion, or $4.82 a share. Just keep in mind that foreign currency translation reduced the company’s earning by 50 cents a share. Exclude this as well as one-time items and it earned $4.704 billion, or $4.98 a share. This was up by 2.5 per cent from $4.793 billion, or $4.86 a share, on the same basis. Similarly, reported revenue fell by seven per cent last year. But on a constant-currency basis (as if foreign-exchange rates had stayed the same), McDonald’s revenue would’ve risen by three per cent.

Growing share buybacks and dividends

In 2015, McDonald’s earnings per share rose despite lower total earnings. That’s because it bought back 51.6 million of its own common shares. Share repurchases raise the earnings per share, all else being equal. Last year the company spent $9.4 billion on share buybacks and dividends.

McDonald’s plans to return $30 billion to its shareholders by the end of this year. In the first two years of its three-year plan, it spent $15.8 billion. This means that the company could spend up to $14.2 billion on share buybacks and dividends. In 2016, it also plans to reinvest $2 billion to build new restaurants and to upgrade existing restaurants.

A dividend paying multinational corporation

One reassuring aspect about McDonald’s is its geographical diversification. It has more than 36,000 locations in over 100 countries. This, of course, lessens the company’s exposure to problems in any given market. At the same time, however, it’s responsive to local conditions. That’s because more than four-fifths of McDonald’s restaurants are owned and operated by independent local business people.

In 2015, McDonald’s is expected to earn $5.38 a share. That would represent earnings per share growth of eight per cent. Based on this earnings estimate, the shares trade at an unattractively-high forward price-to-earnings, or P/E, ratio of 23 times. Next year, the company’s earnings per share are expected to grow by 11.5 per cent, to $6 a share. Based on this estimate, the shares trade at a better forward P/E ratio of 20.6 times. Mr. Easterbrook is optimistic. He said, “As we enter 2016, we expect continued positive top-line momentum across all segments.”

McDonald’s cuts its costs

McDonald’s is also aiming to cut its costs. Chief financial officer Kevin Ozan said it “plans to refranchise about 4,000 restaurants by end of 2018 and reduce our net annual G&A [General and Administrative] spending by $500 million, the vast majority of which will be realized by the end of 2017.”

Lower costs means more money left over for the shareholders, of course. This should further raise the value of McDonald’s shares. They also remain a buy for high and rising dividends.


The Investment Reporter, MPL Communications Inc.
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