Earn a “Hidden” 13.3% Yield from McDonald’s Corporation Stock (MCD)?
Big Returns from McDonald’s Stock
McDonald’s Corporation (NYSE:MCD) might sound like a boring old name, but this company offers one of the best shareholder yields in the business.
If you look up McDonald’s stock on Yahoo! Finance, you’d see that the company has an annual dividend yield of 3.28%. That’s quite a decent number in today’s ultra-low interest rate environment. But did you know that McDonald’s stock could have a “hidden” yield of 13.3%?
For income investors, few things are better than companies returning value to shareholders. But there is more than one way for them to do it. Paying dividends is the most obvious one. When a company makes a decent profit and doesn’t need to reinvest all of it, it makes sense to return some of that profit to shareholders.
At the same time, the company could also repurchase its own shares. While you don’t get a cash payout every time the company buys back its stocks, share repurchases are indeed a way to return value to shareholders.
You see, when a company repurchases and retires its own shares, it reduces the number of shares outstanding. This means each share outstanding will be worth a greater percentage of the company. So essentially, each of the remaining shareholders will own a larger portion of the company.
That’s not all. When you collect dividends, you have to pay taxes on them at the end of the year. When companies buy back their stocks, on the other hand, shareholders don’t have to pay taxes until they sell their shares.
Of course, as is the case with dividends, companies need to have the financial capabilities to make share repurchases. Fortunately, McDonald’s stock is in a great position to do so.
The company’s business is already established. McDonald’s is the second largest fast food chain in the world. There are more than 36,000 McDonald’s restaurants located in over 100 countries. Its well-entrenched position means it can return some of its profit to shareholders; in fact, McDonald’s started doing that decades ago. Since paying its first dividend in 1976, the company has been raising its annual dividend rate every single year. (Source: “Dividends, Splits & Share Repurchases,” McDonald’s Corporation, last accessed October 13, 2016.)
Of course, the restaurant business is not easy to be in. Other than competition, you also have to worry about how the economy is doing. When times are hard, consumers might forgo restaurant experiences and use the money on necessities.
But McDonald’s is not a fancy restaurant chain. Its meals are so affordable that people would still frequent McDonald’s even when the economy is in the doldrums. That’s why despite the economic ups and downs over the past four decades, the company never stopped raising its dividend.
Right now, the company has a quarterly dividend rate of $0.94 per share, giving MCD stock an annual dividend yield of 3.28%.
Paying dividends is just one way for the company to reward shareholders, and McDonald’s is also buying back its shares aggressively. In 2015, the company returned $9.4 billion to shareholders through dividends and share repurchases. Based on the market value of the company at that time, MCD stock delivered a total shareholder yield of 10.5%. (Source: “From 10-K,” McDonald’s Corporation, last accessed October 13, 2016.)
Note that the company has a targeted return of about $30.0 billion for the three-year period ending 2016. By the end of 2015, McDonald’s had returned $15.8 billion of the three-year targeted amount. If the company can complete the remaining $14.2 billion this year, it will have achieved a total shareholder yield of 13.3% based on its valuation at the beginning of 2016.
The Bottom Line on MCD Stock
There is nothing too exciting going on at McDonald’s. The company is not building a virtual reality headset or developing driverless cars. But with a potential 13.3% shareholder yield, income investors should still keep MCD stock on their radar.