Retail

Should McDonald's Be Even More Aggressive on Dividends and Buybacks?

McDonald’s Corp. (NYSE: MCD) held an investor conference presentation on Wednesday, in which the world’s largest retail food chain’s president and chief executive officer, Don Thompson, announced an intensified commitment to returning capital to McDonald’s shareholders. This may not be that $15.15 per hour pay hike that some of the workers want, but it is going to represent a pay hike for its shareholders.

The question is whether the move is aggressive enough when you consider McDonald’s situation right now. As a reminder, McDonald’s is in the midst of a consumer attitude change about fast food toward slightly healthier options.

McDonald’s says that it plans to return $18 billion to $20 billion to shareholders between 2014 and 2016 through a combination of dividends and share repurchases. The company represents this as a 10% to 20% increase over the amount of cash returned between 2011 and 2013.

McDonald’s currently has a dividend yield of 3.2%. Its market cap is $100 billion, and the $101.30 share price compares to a 52-week range of $92.22 to $103.78, as well as to a consensus analyst price target of $106.19.

Are investors willing to chase difficult growth ahead for less than 5% implied upside and an additional 3.2% yield?

Standard & Poor’s jumped in on the matter and said that the McDonald’s credit ratings will not be impacted from the capital plan. S&P pointed out that McDonald’s returned about $16.4 billion from 2011 to 2013. Again, is the plan to increase dividends and buybacks enough?

A $3.24 annualized payout compares to earnings estimates of $5.76 per share in 2014 and $6.25 per share in 2015. That is close to a 56% payout ratio for this year, and frankly that is higher than most companies.

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The company talked up its own internal “Plan to Win” and its shareholder ambitions. Thompson said:

The Plan to Win along with our competitive advantages, System alignment and financial discipline has served as our strategic roadmap, guiding the execution of our global growth priorities. Today, the Plan to Win has evolved as we reenergize the McDonald’s System by placing the customer at the center of everything we do. We are pursuing targeted growth opportunities to provide our customers with their favorite food and drink, create memorable experiences, offer unparalleled convenience and become an even more trusted brand to deliver the most meaningful impact for our customers and our business.

In the Plan to Win, McDonald’s intends to refranchise at least 1,500 restaurants by the end of 2016, primarily in Asia/Pacific, Middle East and Africa and Europe. The company represents that this is more than a 50% increase in refranchising activity, compared with the prior three-year period.

The company also plans to monitor closely its general and administrative costs. The focus is to aim its G&A spending by reallocating resources to higher return initiatives and growth areas. This will include in the company’s global digital capabilities development.

While we would like to see a higher dividend from McDonald’s, it turns out that having a 56% payout ratio before items is well above average for everything but utilities and other less volatile sectors. That also does not account for stock buybacks, but remember that McDonald’s repurchasing shares now is very close to an all-time high.

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