The American fast food major McDonald’s (MCD, Financial) has some good news for its investors. On Thursday, the company announced to give a 5% hike in dividend payment. The maker of Big Mac said that the company’s board decided to pay a quarterly dividend of $0.85 a share, up from $0.85 a share. The company generally announces the dividend hike in September
Returning value to shareholders
In 2013, the company had given an increase of 5%, 10% in 2012, and 15% in 2011. McDonald’s started paying dividend from 1976, and since then the company’s maintained a history of raising it every year. The company’s president and CEO Don Thompson said:
"Today's dividend increase reflects the continued strength and sustainability of our cash flow and our commitment to enhancing shareholder value."
Thompson confirmed the fast food chain’s desire to return around $18 billion to $20 billion to its shareholders over the next couple of years. Year to date McDonald’s has rewarded its investors with an amount of $3.2 billion.
McDonald’s 10 year dividend payout ratio (in %) with the trend line, Data from Morningstar
McDonald’s dividend payout ratio history in the past 10 years show a very healthy growth. The quick service restaurant chain has always maintained a payout ratio at a stable rate. In the chart above, the trend line gives a clean upward trend of dividend payments. There is an abrupt spike in the chart for the year 2007, when the payout ratio was increased to 77.7%. The earnings per share during that year saw a dramatic fall of 30%, thus the company had to raise the payout to keep raise the dividend payment and keep investors faith intact.
Overcoming hardships
Oak Brook, Illinois based hamburger chain has been facing difficult times both in the home market as well the lucrative growth market of China. As Americans are opting for healthier food, demand for fatty burgers are declining and McDonald’s in turn is suffering from declining sales. To counter this trend, McDonald’s is increasing its focus on “build your own burger” with healthier options for its customers. Similarly in China, where the company’s continuously facing supply chain challenges, it’s tightening the process and as a measure has also cut ties with vendors that supplied expired meat.
This month the company registered its August sales which were the lowest in the last decade. Global same stores sales reduced by 3.7%. Despite challenges as these, the company continues to pay good dividends to investors, thanks to its solid cash flows. McDonald’s has strong fundamentals. A lot has been said about the current headwinds that the company’s facing. However, the dividend hike should have reinstated confidence in investors who were a bit worried about the company’s prospects. In addition, lower capital spending ensured higher free cash flow to fund the dividend payment.
Dividend payout ratio has increased in the past few years, however it is expected to normalize in the coming year considering that there would be improvement in sales. But in case recovery stalls, regular increase in dividend would become a risky proposition for the company.
Parting thoughts
McDonald’s has maintained a history of being a good dividend payer. With strategies in place, strong marketing campaign, and refreshed menu, the company is poised to report better financials in the future.
