McDonald’s Dividends Continue Amidst Restaurant Industry Challenges
It’s time to work through a McDonald’s stock analysis. Plus a review of the McDonald’s dividend metrics.
But first, I sometimes wonder what has happened to my personal values. Since I invest in:
- Tobacco companies
- Defense contractors, and
- Fast food restaurants
Allow me to be honest. I’m not a socially conscious investor.
As long as those dollars are going to legal businesses. I just follow the dividends. And today we are reviewing McDonald’s dividends.
Let’s start off by answering some important questions. As the key takeaways from the rest of the article.
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
Is McDonald’s A Good Dividend Stock?
Yes. As I assess my finances, McDonald’s is a good long-term dividend stock. The company’s dividend history and track record of dividend increases are quite impressive.
On the other hand, McDonald’s stock currently has a relatively low dividend yield. And modest projected annual dividend growth.
In other words, the stock does not have an attractive combination of income and income growth potential right now. At least not for me, as a dividend growth stock investor.
Is McDonald’s Stock A Good Buy?
For a long-term investor, yes. McDonald’s is a good stock to buy. But…
Right now the stock is a little overvalued, in my opinion. So, it does not appear to be a good stock to buy at this time.
Absent changes in the fundamentals. Only a correction in the stock price will make me interested in purchasing more McDonald’s shares.
Furthermore, McDonald’s has a mid-sized position in my dividend growth stock portfolio. But, as I said, I won’t be a buyer at these prices.
McDonald’s is a good stock for the long-term. Consider buying it on any price weakness and hold it in that IRA account you have planning to open.
With those key questions taken care of. Let’s dive into the details of our McDonald’s stock and dividend review.
McDonald’s Company Background
The Company franchises and operates McDonald’s restaurants in the food industry.
McDonald’s was founded in 1940 and has become the world’s largest restaurant chain based on revenues.
If you like a little nostalgia, check out the company’s history on its website. It is pretty interesting.
Kind of a slice of America. As McDonald’s came of age over the decades.
The McDonald’s brand is truly global. The “golden arches” are recognized internationally.
However, the majority of the restaurants are owned and operated by thousands of small and mid-sized businessmen and women. These business owners are known as franchisees.
More than 80% of restaurants worldwide are locally-owned franchises. And the count is even higher in the United States at more than 90%.
I like it when I find dividend stocks with easy-to-understand strategies. So, the simplicity of McDonald’s growth plan works for me.
What is it? Well, their goal is to grow by serving more customers, more often. And by providing those customers good value for their money.
McDonalds’ seeks to:
- Retain the customers they have
- Regain the customers they have lost
- Convert casual customers to frequent committed customers
Furthermore, underlying these growth initiatives is a focus on:
- Digital interactions with their customer base
- Delivery of food and beverages to home, offices, and other community locations
- Elevating the restaurant experience through people and technology
Source: McDonald’s Growth Strategy
McDonald’s Stock Symbol
Finally, McDonald’s stock trades on the New York Stock Exchange. It operates under the stock symbol MCD (NYSE: MCD).
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We now have some background on McDonald’s business. So, let’s turn our attention to the main course. The McDonald’s dividend.
Does McDonald’s Pay A Dividend?
Yes. Of course. McDonald’s stock pays dividends. I would not own it otherwise.
So, let’s learn all there is to know about dividends McDonald’s pays investors.
McDonald’s Dividend Per Share
The company pays an annual forward dividend of $5.16 per share.
McDonald’s Dividend Yield
As a result, this is a 2.5% McDonald’s dividend yield at the recent stock price.
First of all, dividend yields move in the opposite direction of a stock’s price.
Furthermore, we all know how quickly stock prices can changes.
So, it’s always a good idea to check for a stock’s current dividend yield. Before investing money for dividends.
How Often Does McDonald’s Pay Dividends?
McDonald’s dividends are paid quarterly. Or, 4 times per year.
The quarterly dividend is one-fourth of the annual dividend rate. That I just mentioned above.
When Does McDonald’s Pay Dividends?
The company’s dividends are routinely paid in specific months. They are March, June, September, and December.
The timing and frequency of McDonald’s dividends are a typical payment pattern. For many of the U.S.-based dividend stocks, I like to hold in my investment income portfolio.
McDonald’s Ex-Dividend Date
To receive the next McDonald’s stock dividend payout. You must complete your purchase BEFORE the ex-dividend date.
McDonald’s ex-dividend date usually falls on the last day of the month PRIOR to when dividends are paid.
The ex-dividend date is slightly different each quarter. So, it’s best to check McDonald’s dividend information on its investor relations website. You can get the exact McDonald’s ex-dividend date for each quarterly dividend there.
McDonald’s Dividend History
McDonald’s has raised its dividend each year since paying its first dividend in 1976.
Beginning in 1976 and through 2000, McDonald’s paid a quarterly dividend. From 2001 to 2007 the Company transitioned to offering dividend payments just 1 time per year. Then, starting again in 2008, dividends are paid on a quarterly basis.
Source: McDonald’s Dividend History
McDonald’s Is A Dividend Aristocrat
A Dividend Aristocrat is a company in the S&P 500 stock index that has paid and increased its dividend every year for at least 25 consecutive years.
McDonald’s clearly meets the criteria of a Dividend Aristocrat. Because management has a long and impressive track record. Of increasing McDonald’s dividends each year.
Are you interested in trading other Dividend Aristocrat stocks? Then, here is a table of some others that I cover at Dividends Diversify.
On a side note. As I look at this list. It occurred to me that none of my utility sector dividend stock holdings have made it as Dividend Aristocrats.
But now, back to our McDonald’s stock analysis and dividend review.
So, we know that McDonald’s has a long history of increasing dividends. But, what does McDonald’s dividend growth look like? Let’s look at that now.
McDonald’s Dividend Growth Rate
As shown in table 1, McDonald’s dividend growth has been steady and consistent for the last 7 years.
Table 1: McDonald’s Compound Annual Dividend Growth Rate
|1 Year||3 Years||5 Years||7 Years|
Furthermore, the 2018 McDonald’s dividend increase broke the trend to the upside at nearly 15%.
Most Recent McDonald’s Dividend Increase
While the company’s dividend was increased by another 3.2% closing out 2020 and heading into 2021.
Not bad for a time when many of their restaurants were closed. Or offered only drive-through service.
McDonald’s Dividend Policy
It is clear to me that McDonald’s has a dividend policy based on the bird in hand theory. I can tell from their long record of such payments.
On the other hand, I have found no formal communications to investors about future dividend growth. Or, future dividend payout targets.
This is not unusual. However, I appreciate it when a company provides specific future guidance about the dividend. But, it is not a concern when they choose not to do so.
For now, that concludes the dividend review. I will come back to dividend safety. And make a dividend growth forecast in a moment.
But next, let’s look at some of the business fundamentals…
McDonald’s Revenue Trend
Revenue has been on the decline for a number of years. 2020 was no different because of temporary restaurant closures dictated by the global health crisis.
Chart 1: McDonald’s 7-Year Revenue Trend
On the other hand, McDonald’s strength should allow for greater market penetration. Why?
Because other lesser established restaurants may close their doors for good. Reducing competition for consumer spending on meals prepared away from home.
Nevertheless, 2020 was a tough revenue year for McDonald’s. But I expect the world, including restaurant visits, to return to a mostly normal state sometime in 2021-2022.
And now, McDonald’s revenue is at a base. From which I believe it can grow again.
But, I want to discuss the longer, bigger picture trend as it relates to McDonald’s revenue.
More Franchised Restaurants
Revenue declines have primarily been due to the company’s re-franchising efforts.
Because, over the past few years, McDonald’s has intentionally shifted to a greater percentage of franchised restaurants. Rather than company-owned establishments.
This shift negatively impacts revenues as Company-operated restaurant sales are replaced by franchising revenues.
As a franchiser, McDonald’s receives rent and royalties. Rather than revenue from the sale of food and beverages.
The Advantages Of Franchised Restaurants
The advantage of this strategy is higher profit margins. And, less need for capital expenditures to build new, and remodel old restaurants.
As a result, the company’s gross profit margin dollars have remained stable during this period of declining revenue.
Furthermore, gross profit as a percentage of sales has increased nicely. And that is a positive financial indicator.
Next, we will cover McDonald’s dividend payout ratios. Based on both accounting earnings and cash flow.
McDonald’s Dividend Payout Ratio Based On Earnings
Since I take a long-term view looking for consistent dividend stocks, I won’t base analysis or long-term investment decisions on 2020 financial performance.
Why? Because I expect McDonald’s dividend payout ratios to be much higher than usual in 2020. This is not an ideal situation as it relates to McDonald’s dividend safety.
But I am willing to chalk it up as an exception because of the unanticipated restaurant closures. And watch closely for improvement as we move through 2021 and 2022.
Chart 2: MCD 7-Year Dividend Per Share & Earnings Trend
Until 2020, earnings per share had grown rapidly over the last several years. This is a result of
- Reductions in selling, general and administrative expenses
- Gains realized on the sale of company-owned restaurants and their real estate as part of the re-franchising effort
- Fewer shares of stock outstanding as a result of company share buybacks
For 2020, the McDonald’s dividend payout ratio ran almost 80% of earnings. This is a historically high level. On the other hand, I expect McDonald’s dividend payout ratio to fall this year.
A lower dividend payout ratio is generally better. It shows the company has ample room to raise the dividend in the coming years. Or, withstand an earnings drop without having to reduce the dividend.
Next, I want to check dividend payments against free cash flow.
MCD Dividends And Cash Flow
In 2020, the dividend consumed 81% of free cash flow.
Even though higher than normal. This is still an acceptable level for a large mature company like McDonald’s.
Chart 3: McDonald’s 3-Year Cash Flow And Dividends Trend
As I said, I expect management to let the dividend payout ratio drift lower in the years to come. This will keep a damper on dividend growth.
Furthermore, management has stated their priorties for cash in this order:
- Reinvest in the business to grow and improve operations
- Support the dividend
- Reduce debt
Finally, share repurchases were temporarily suspended. When cash gets scarce, one can more clearly see where management’s priorities lie.
Dividends over and above share repurchases. I like the company’s priorities in this regard.
Next up, I make a dividend growth forecast for all of my dividend stocks. Let’s talk about that now.
McDonald’s Dividend Growth Forecast
First of all, I expect the next McDonald’s dividend increase to be announced later this year to be relatively small. Similar to last year’s 3+% hike. Just enough to keep the company’s annual dividend increase streak alive.
On the other hand, I expect long-term dividend income growth to be much better. Remember that I am assuming the world will return to a more normal state sometime in 2021-2022. And McDonald’s may even emerge on stronger ground.
So, I’m forecasting future dividend growth in the 5-7% range for 2022 and beyond.
McDonald’s Financial Position
A company’s financial position is important to understand. Especially during a difficult business environment.
When I look at my total financial picture, I do not like taking extra risks when investing in dividend stocks. So, I prefer stocks with high credit ratings and modest debt levels.
Since reliable dividend income is very important to me. Let’s see how McDonald’s measures up in these areas now.
A company’s credit rating can make a big difference between companies that struggle. And those who thrive during difficult times.
A corporation’s credit rating is similar to how your personal credit score works.
Specifically, higher ratings mean lower risk to those who lend the company money. Also, higher ratings mean lenders will likely get their money paid back when it is due.
McDonald’s has BBB+ and Baa1 investment grade-moderate credit risk ratings.
These ratings are provided by two of the big rating agencies: Moody’s and S&P.
They are adequate. But, at the lower end of the investment-grade spectrum as shown in the chart above.
Most companies with high-quality dividend stocks have an investment-grade credit rating. And McDonald’s is no exception.
Would you like to check your personal credit score? Good personal finance calls for keeping an eye on it. You can do so for free using Credit Karma.
Debt Levels Have Been On The Rise
Lower credit ratings for McDonald’s are likely due to the large debt levels carried by the company.
Because McDonald’s has taken on debt. To fund the combination of large dividend payments for investors. And share repurchases in the stock market.
2020 was no exception to increasing debt. On a positive note, the company was able to access credit markets to improve liquidity during the year. And most of the increased debt sits on the balance sheet in the form of cash reserves.
Returning large amounts of cash to shareholders in the form of dividends and share repurchases is a great practice by management. But, borrowing money to do so can be risky.
The debt levels and credit ratings should be watched closely moving forward. And they a reason, in my opinion, dividend growth will be constrained in future years.
McDonald’s Dividend Safety
Because of its dividend history, I believe management will go to great lengths to protect the current dividend.
Financial leverage and debt do concern me and need to be monitored. But the dividend is well covered by earnings and cash flow.
Putting these facts together, I consider McDonald’s dividend safe from a reduction for the foreseeable future.
Last but not least, stock valuation. Then I will wrap up.
McDonald’s Stock Valuation
McDonald’s stock price has risen dramatically over the past decade.
So, my guess is that McDonald’s stock is overvalued, but let’s prove that out.
I will use the following valuation measures:
- Single-stage dividend discount model
- Morningstar fair value estimate
- Price to earnings ratio
- Dividend yield
McDonald’s Dividend Discount Model
The single-stage dividend discount model considers several factors I have discussed thus far:
- The current annual dividend payment
- Projected dividend growth
- My desired annual return on investment – 9%
Based on these assumptions, the dividend discount model suggests the fair value of McDonald’s stock at $182 per share.
Morningstar Fair Value Estimate Of McDonald’s Stock
The investment analysis firm, Morningstar, believes McDonald’s stock is fairly valued at $231 dollars per share.
Source: Morningstar investment research
McDonald’s Stock Price To Earnings Ratio
The McDonald’s stock price to 2020 earnings is more than 30 times.
It is not uncommon for a high-quality dividend growth stock to be more highly valued than the overall stock market. But McDonald’s stock value looks a little excessive to me. Especially given its modest growth prospects.
Remember that in most cases, a lower price-to-earnings ratio typically represents a better value for the investor.
McDonald’s Dividend Yield
As regular readers know, I prefer to buy dividend stocks with higher yields in the 3-5% range. And McDonald’s dividend yield is just a little over 2%.
I personally would prefer to buy more McDonald’s stock at a minimum 3% dividend yield. A 3% dividend yield would give us a McDonald’s stock price of $172 per share.
McDonald’s Stock Valuation Summary
We have looked at a number of valuation methods. With the exception of Morningstar, all of them suggest McDonald’s stock is overvalued.
Here is a summary:
- Dividend discount model – $182 per share
- Morningstar fair value $231 per share
- 3% dividend yield – $172 per share
- Price to earnings ratio – stock looks “pricey”
McDonald’s Dividend Stock Analysis Wrap Up…
Let’s recap our dividend stock analysis. Because we have covered a lot of ground regarding the McDonald’s business, McDonald’s dividend, and McDonald’s stock.
The company has migrated to more franchised-owned stores. And this business model has reduced the need for capital expenditures. Also, it has increased profit margins.
I believe that McDonald’s brand and financial strength will allow for increasing market share given the current environment. As other restaurants close their doors for good. During these challenging times for the restaurant industry.
The company’s dividend appears safe. And looks poised to grow modestly in the years to come.
But, the stock looks expensive to me. So, I’m not a buyer at recent price levels.
But, I am happy to hold my McDonald’s stocks. As a part of my long-term dividend growth investment portfolio.
It’s perfect to hold for the long-term. In an IRA account.
More Reading About Dividend Investing And Dividend Stocks
- Our full library of dividend related articles
- Vanguard utility (VPU) ETF review
- How to build a portfolio for monthly dividends
More Resources To Improve Your Dividend Investing Game
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|M1 Finance: Put your dividend stocks in an M1 Finance IRA account|
|Simply Investing: Get quality dividend stock recommendations|
|Morningstar: Investment research from the pros|
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