McDonald’s is a dividend rich company. The dividend has grown from $2.05/share in 2009 to $3.12 for 2013, a CAGR of 11%. The payout ratio has crept up from 49% in 2009 to 56% (projected) in 2013, which still leaves the company plenty of room to grow their dividend. Not only has McDonald's been able to consistently increase its dividend, but the rate of increase has been impressive, making this company a dividend growth investment stalwart. The stock has experienced a blistering 24% compound annual growth rate in the dividend over the 10-year period ending in 2012. The company confirmed its earlier forecast for 3-5% same store sales growth and 6-7% operating income growth. The payout ratio also is very good. Diluted earnings per share and net earnings rose by 6.3% and 4.6% respectively. Tight expense control drove the revenues from company-owned restaurants and franchised stores by 1.8% and 3.7% respectively.
Head to Head
McDonald’s faces stiff competition from Burger King (BKW). The company is offering premium items like Rib Sandwich, Carolina BBQ Favorites, Turkey Burger, Buffalo Chicken Strips, and more. It is modernizing its restaurants in order to improve its brand perception. It has added premium menu options and gourmet coffees, renovated restaurants and overhauled its advertising campaign. MCD has a strong competitive advantage over BKW. It is easier for McDonald's to negotiate more favorable lease terms with landlords and developers, due to its scale of operations. Unlike Burger King, McDonald's is full of assets, from land to hamburgers that can be recognized by most people in the world.
Amongst its peers, Wendy’s (NASDAQ:WEN), YUM! Brands (NYSE:YUM), and Domino’s Pizza (NYSE:DPZ) give some competition to this company. YUM posted a weak third quarter earnings as net income declined by 68%. The company gets about 50% of its revenue from China, where it is finding it hard to sustain follows a slower economy.
WEN is making up its restaurants in a big way, and has also strengthened its value proposition by adding over $1 billion in market capitalization already. It is the world's third largest quick-service hamburger company. The Wendy's system includes more than 6,500 franchises and company restaurants in the U.S., and 27 countries and U.S. territories worldwide.
Another close competitor of MCD is Chipotle Mexican Grill, Inc. (NYSE:CMG). The company currently owns 1,502 restaurants of which 1,490 are in the U.S., five in Canada, six in London and one in Paris. Chipotle is comparatively expensive when compared to MCD. Opening a Chipotle in lower-income areas cannot provide the same returns as opening up a McDonald's in the same area. Its P/E ratio is also much higher than the industry average.
MCD has a relatively small market in India, so the beef-centric fast-food chain plans to open vegetarian-only restaurants next year. This is a totally new strategy for the company, signaling a growing effort for expansion in India (where the majority of people doesn't eat beef). McDonald's is also venturing into the coffee market with the expansion of McCafe designed to appeal to coffee lovers with tight budgets, a common pattern in recessions.
McCafe is a great move by McDonald´s - it adds to profitability due to higher profit margins than the traditional fast food business, and it diversifies the company away from those fattening products with their negative health implications. McDonald´s will certainly continue expanding in the coffee business and its size and global presence makes it a company to watch out for.
While the whole breakfast menu will not be available before standard breakfast hours, favorites like the Egg McMuffin (and its Egg White Delight variant), sausage burritos, hot cakes, oatmeal, and hash browns will surely be there. They will co-exist with staples like Big Mac burgers and chicken nuggets. It is unbelievable but true - McDonald’s has as many as 140 items on its menu and there are 160 more in the pipeline. The company keeps introducing new items, and pulling off the old ones to keep the menu fresh. Management confirmed it will spend $2.9-3 billion to open 1,500-1,600 stores while remodelling 1,000 more. In 2013, management trimmed its capital spending plans by $100 million to $3 billion due to lagging sales in China and other emerging markets.
On a Concluding Note
The company is a member of the S&P 500 dividend aristocrats, which are companies that have increased their dividend every year for the past 25 years or more. MCD is surely amongst the best breeds in the fast food industry, and it may be a worthwhile investment for the conservative investors. The company boasts a global operation coupled with an iconic brand image and a history of stellar business operations. McDonald’s is a safe blue chip with a great yield you can hold for years to come. McDonald´s has an attractive proposition for value-conscious customers.
It is a solid company overall. The global slowdown is certainly making its effects known, but the fast-food giant has solid fundamentals and improving technicals. Consistency usually wins in most aspects of life, and it is no different with fast-food and restaurant menus. This is one of the reasons why Chipotle is highly profitable. MCD is one of the most respected global brands, even despite its current problems. MCD may be a good bargain moving forward, and with its worldwide brand recognition and presence, it is bound to be around well into the future.