Plain Dividend Yield’s For Chumps: Can 20% Payout Growth at McDonald’s Continue?

Over the past five years McDonald’s (MCD) has served up 20.4% annualized dividend growth. That ranks the burger behemoth #3 among S&P Dividend Aristocrats-companies in the S&P 500 index that have managed annual dividend increases for at least 25 consecutive years.

McDonald’s is also feeding investor income cravings. The stock’s 3.4% dividend yield is well above the 2.7% 12-month yield for the Barclays Aggregate Bond index of Treasuries and high-grade corporate bonds.

This article is part of a series on the 10 stocks among the Dividend Aristocrats with the greatest dividend growth. Earlier articles featured Clorox (CLX), T. Rowe Price (TROW), Wal-Mart (WMT), Medtronic (MDT), Aflac (AFL), W.W. Grainger (GWW) and Target (TGT).

With $3.9 billion in free cash flow, McDonald’s dividend is in no danger. But the rise in its payout ratio suggests future dividend growth will be well below its 20% five-year pace unless there is a significant uptick in earnings growth.

MCD Cash Div. Payout Ratio TTM Chart

MCD Cash Div. Payout Ratio TTM data by YCharts

In the past year, McDonald’s dividend hike was 12%. That’s still robust, when you consider inflation is hovering near 3%, but it’s well below its own hard-to-match trend line.

While McDonald’s is typically a go-to example of a can’t miss multinational primed for global growth -- a rising middle class in emerging markets want burgers and fries! -- sales haven’t followed the script. Coca-Cola (KO), another iconic low-cost consumer brand has fared much better coming out of the recession, as has burger-competitor Yum Brands (YUM), the umbrella for KFC, Pizza Hut and Taco Bell.

MCD Revenue TTM Chart

MCD Revenue TTM data by YCharts

Over the past year, Return on Equity (ROE) has stalled out, and Return on Assets (ROA) slipped more than 3%.

MCD Return on Equity Chart

MCD Return on Equity data by YCharts

In its third-quarter 10-Q filing, management said it expects more sluggishness for a while as it executes its “Plan to Win” operational overhaul that is focused on “being better, not just bigger.”:

“We expect our revenues and operating income will remain under pressure at least for the next few quarters. Our near-term focus is on increasing guest counts and market share by emphasizing exceptional value across the menu, including products offered at an affordable entry price point that may negatively impact average check. We plan to build on this foundation by featuring premium products and promotions that encourage purchases of higher margin products and generate a higher average check.”

The big question is whether the current sideways performance is a temporary lull or if McDonalds’ 34,000 restaurants worldwide reached the saturation point.

While that plays out, McDonalds’ 3.4% dividend yield is available at a PE ratio that is neither rich nor cheap.

MCD PE Ratio TTM Chart

MCD PE Ratio TTM data by YCharts

Per-share earnings growth has been helped along by an aggressive stock repurchase program that has reduced the total number of shares outstanding more than 12% over the past five years. With nearly $4 billion in free cash flow, management continues to have some maneuvering room to for more buybacks and dividend hikes. But as the rising payout ratios show, it’s getting harder to pull off without organic earnings growth.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.

Read more articles about: Company Analysis  

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