McDonald's Wants to Increase Its Dividend at the Expense of Profits

NEW YORK (TheStreet) -- McDonald's (MCD) finds itself in a bit of a pickle. It needs to be generous with its dividend-hungry shareholders at a time when the fast-food leader appears less concerned about doing so in a way that boosts earnings or increases sales.

This immense challenge comes at a time when its stock price has stalled and the company's plans for growth seem as bland as a salad without dressing. McDonald's competitive focus isn't even about besting other chains like Burger King (BKW) or Wendy's (WEN). MCD closed Monday at $102.03, up 5.1% for the year to date and 5.7% for the past 52 weeks.

Visit a McDonald's and you'll see what I mean. The company's McCafe coffee drinks and breakfast menu appear to be as center stage as its burgers and french fries.

McDonald's is going after the coffee crowd and has set it sights on taking business from Starbucks (SBUX) and Dunkin' Brands (DNKN). If you order Petite Breakfast Pastries with your coffee you'll understand how competitive McDonald's pricing is. It"s hard compete with the Golden Arches.

But the biggest challenge the company faces is the one it's created for itself. Last week at an investor conference McDonald's CEO Don Thompson said the company plans to bolster its payout to shareholders by as much as 20% over the next 30 months.

The company announced it plans to reward shareholders by returning upwards of $20 billion through stock buybacks and dividend increases by the end of 2016. That would amount to as much as a 22% increase in payouts from the previous three years ending in 2013.

This comes at a time when shares of McDonald's have already had a powerful move higher in just the past four months, as the year-to-date chart below illustrates.

MCD Chart
MCD
data by YCharts


Since February shares have rocketed 11.6% higher, reaching a zenith on May 14 of $103.78. That leaves little upside potential even with my generous 12-month price target of $106. Then there's the issue of the dividend.

At $102 the dividend yield-to-price is a savory 3.18%. But even if the yield rose to 4% it's hard for investors to get excited about a potential 12 month total return of 7 or 8%. Then there's the company's surprising strategy for giving more to its stockholders.

You'd expect the company to announce some new irresistible menu items or an expansion plan to goose profits and cash flow. That's not exactly what management has in mind.

During the conference CEO Thompson said the plan to fund the company's generosity included the sale of company-owned restaurants to franchisees, cost reductions and taking on more debt.

Thompson said McDonald's goal is to sell at least 1,500 restaurants in international regions. No details were given on how much the company plans to borrow, but with interest rates so low it's an option worthy of consideration.

McDonald's also needs to grow its operating cash flow, currently near $7.3 billion. It must take big steps to increase profits as well. In the first quarter of 2014 its year-over-year quarterly profit fell by 5%.

The good news for shareholders is McDonald's first-quarter cash rose nearly 32% from the year-ago quarter to $2.74 billion. As the company focuses on selling goodies that uphold its 30% operating margin and sells plenty of company stores, that cash hoard should balloon.

Add to the recipe thirsty bond buyers who will lend the company all the money it needs and voila, shareholders will be rewarded as planned. Meanwhile, if you're waiting for catalysts to move the stock higher management may need to do something extraordinary like split the stock or acquire Starbucks.

At the time of publication the author had no positions in any of the companies mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Google+

>>Read more: Buffett Ready for Obama Coal Cuts as Berkshire Targets Renewables

Marc Courtenay is the founder and owner of Advanced Investor Technologies LLC as well as the publisher and editor of www.ChecktheMarkets.com.

If you liked this article you might like

Chili's Owner Brinker International Offers a Real Value Menu

Chili's Owner Brinker International Offers a Real Value Menu

How the New CEO of Applebee's and IHOP Plans to Save Iconic Restaurant Chain

How the New CEO of Applebee's and IHOP Plans to Save Iconic Restaurant Chain

Brinker Looks Tasty Even After 7% Rally

Brinker Looks Tasty Even After 7% Rally

Buy Stocks That Are Right for You: Cramer's 'Mad Money' Recap (Friday 2/16/18)

Buy Stocks That Are Right for You: Cramer's 'Mad Money' Recap (Friday 2/16/18)

Video: 5 Insane McDonald's Meals You Can Only Try Abroad

Video: 5 Insane McDonald's Meals You Can Only Try Abroad