Fries with That Dividend Increase?

10/12/2011 11:00 am EST


John Heinzl

Reporter and Columnist,

McDonald’s keeps raising its payout, as it has done for 35 consecutive years, writes John Heinzl, reporter and columnist for Globe Investor.

On September 22, a day marked by a brutal stock plunge and gloomy economic headlines, fast-food giant McDonald’s (MCD) served up one of the few pieces of uplifting news.

Even as other companies were bracing for bad times, the world’s biggest burger chain announced a 15% dividend increase, citing its "ongoing business momentum" and "confidence in the long-term strength of our brand."

Surprised? You shouldn’t be. Since paying its first dividend in 1976, the Golden Arches has demonstrated its resilience by hiking its payment to shareholders for 35 consecutive years—through recessions, inflation flare-ups, wars, and assorted financial crises and market meltdowns.

The past ten years in particular—when McDonald’s launched an image makeover that included healthier menu items, remodeled stores, and the rollout of trendy McCafés—have been especially rewarding for dividend investors. Over that time, the dividend has soared more than 12-fold, to an annualized rate of $2.80 a share (from 22.5 cents in 2001).

While shareholders (disclosure: I am one) shouldn’t count on such massive hikes in the future, analysts expect the dividend to continue growing as McDonald’s pushes deeper into emerging markets such as China and India, and gains market share in the United States and Europe.

"We believe double-digit annual growth in both [earnings per share] and dividends is likely to continue into the foreseeable future," Raymond James analyst Bryan Elliott said in a recent note, in which he initiated coverage of McDonald’s with an "outperform" rating. "The company has the management team and the systems in place to sustain its current position of strength."

In China, for example, McDonald’s is about one-third the size of its largest competitor, KFC owner Yum Brands (YUM). But McDonald’s plans to expand aggressively, aiming to have 2,000 restaurants in China by the end of 2013, up from 1,287 at the end of 2010.

That would still account for only a small portion of the more than 33,000 McDonald’s units in 118 countries worldwide.

"McDonald’s still has lots more potential for international growth, and its offerings are affordable, so it’s well positioned to weather an extended period of high unemployment and stagnating wages," said Christopher Varley, a Toronto art dealer and dividend investor who owns McDonald’s shares.

Is McDonald’s stock a slam dunk? No. Investors have come to expect strong same-store sales growth from the company, and when numbers disappoint, the stock can get clobbered.

That’s what happened in September, when a modest slowdown in same-store growth in several markets sent the stock down 4%. (It has since recovered all of those losses.)

Another risk is an economic slowdown. While people still have to eat in a recession and may trade down to less-expensive fare, a drop in consumer spending could exacerbate the cutthroat discounting that’s already a feature of the fast-food marketplace, denting McDonald’s profit. Rising commodity costs could similarly take a bite out of the company’s bottom line.

Finally, Canadian investors need to be mindful of the currency risk of investing in any foreign company. Should the Canadian dollar rise, the value of their McDonald’s shares—and the dividends they throw off—would fall. [Of course, that isn’t an issue for investors Stateside—Editor.]

That said, McDonald’s shares, which are currently yielding about 3.1%, offer a tempting combination of skilled management, a powerful global brand name, a long track record of dividend growth, and the strong likelihood of future increases.

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