The company’s last dividend increase was in September 2011 when the Board of Directors approved a 14.80% increase to 70 cents/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 16.70% to its shareholders.
The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 23.80% per year. Analysts expect McDonald’s to earn $5.44 per share in 2012 and $6.02 per share in 2013. In comparison McDonald’s earned $5.27/share in 2011.
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. 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 10% in 2002 to 30% 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 27.40% per year over the past decade, which is much higher than to the growth in EPS.
A 27% 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.
The dividend payout ratio has increased from 31% in 2002 to 48% in 2011. 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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Thanks for your research as usual!!!
ReplyDeleteJ
I love this stock. MCD is a good mix of growth and value.
ReplyDeleteI'm liking this posting, but one thing that I think should be considered is whether or not the current price of MCD is a good entry point. Its really, really expensive and if you want to buy to lock in a source of dividends some stocks like PFE or JNJ might be a bit cheaper.
ReplyDeleteThis is a great dividend growth stock that could be bought under $95 if you are patient; I am still waiting for the right entry point. Price to earnings multiple <18, 3% dividend yield, 5-7% top line revenue growth, can't go wrong. Here are some interesting facts about MCD.
ReplyDeleteMcDonalds is truly a global competitive brand with an average of 69 million customers visiting its stores every single day in over 120 countries. The company’s revenue breakdown comes from 32% (US), 39% (Europe) and 23% (Asia, Middle East and Africa). The company grew its comparable same store sales at an average of 3.1% in fiscal 2012.
Source: http://www.2topdividendpayingstocks.com/mcdonalds-dividend-analysis.html
For dividend growth stocks such as McDonalds, I like to see stable Return on Equity (ROE) over the past decade. Return on Equity is a measure of net income divided by shareholder's equity and shows if the firm is efficiently able to generate profits from every common stock held by shareholders. Note the company has been able to steadily grow its ROE from 12.28% in 2003 to 35.73% in 2012; except for a decline in 2007 when ROE was 15.67%. This decline is due to the company taking a pre-tax operating charge of $1.7 billion related to impairment as a result of sale of its businesses in 18 Latin American and Caribbean countries.