McDonald’s Corp: Collect Increasing Dividends From a Restaurant Stock?
Rising Dividends From an Unlikely Industry
It’s no secret that in today’s extraordinary environment, restaurants have not been doing very well.
At the onset of the COVID-19 pandemic, many local governments imposed lockdowns, meaning numerous restaurants had to close. And even after the lockdowns were lifted, business hasn’t been the same. In some areas, restaurants still aren’t allowed to have customers eat inside. And most of the restaurants that are allowed to open their dining rooms haven’t been getting the same customer traffic as before.
Therefore, it shouldn’t come as a surprise that restaurant stocks have been cutting their dividends. Darden Restaurants, Inc. (NYSE:DRI), Bloomin’ Brands Inc (NASDAQ:BLMN), and BJ’s Restaurants, Inc. (NASDAQ:BJRI) are just three of the restaurant stocks that suspended or reduced their payouts earlier this year. And these are established, public-listed companies that have managed to survive the impact of the pandemic. For many smaller restaurants, the temporary closures during the lockdowns have turned out to be permanent.
So, what do you think has been happening to the dividends of McDonald’s Corp (NYSE:MCD)?
Nope, the company did not cut back its payout. As a matter of fact, it did the exact opposite.
On October 7, the McDonald’s board of directors declared a quarterly cash dividend of $1.29 per share, which represented a 3.2% increase from the company’s previous quarterly payout of $1.25 per share. The dividend was paid on December 15 to shareholders of record as of December 1. (Source: “McDonald’s Reports Third Quarter 2020 Comparable Sales, Raises Quarterly Cash Dividend and Announces November Investor Update,” McDonald’s Corp, October 8, 2020.)
In other words, after going through what has been arguably the restaurant industry’s most challenging period, MCD stock gave shareholders a pay raise.
If you’ve been following the company, this announcement shouldn’t really come as a surprise.
You see, McDonald’s stock is one the most resilient dividend payers in the stock market, and it’s been that way for a long time. Since the restaurant giant paid its first-ever cash dividend in 1976, the company has raised its payout every single year. (Source: “Stock Information,” McDonald’s Corp, last accessed December 22, 2020.)
Also, even though there are more than 39,000 McDonald’s locations in 100 countries around the world, the vast majority of those restaurants (approximately 93%) are owned and operated by franchisees. Therefore, the company does not have to deal with the massive operating costs of running all these restaurants and can simply collect royalties and rent from its franchisees (McDonald’s also owns the land and buildings for most of its locations).
In recent years, McDonald’s has streamlined its operations. From 2014 to 2019, the company’s operating margin expanded from 29% to 43%. During the same period, its free cash flow grew from $4.1 to $5.7 billion. (Source: “Financial Outlook,” McDonald’s Corp, November 9, 2020.)
No doubt, the pandemic still had an impact on McDonald’s Corp’s business. But according to its latest earnings report, the company has survived the economic downturn in much better shape than most of its peers.
In the third quarter of 2020, McDonald’s generated $5.4 billion in total revenue, which was down just two percent year-over-year. Excluding special items, the company’s earnings came in at $2.22 per share for the quarter, which actually marked a five percent increase from a year earlier. (Source: “McDonald’s Reports Third Quarter 2020 Results,” McDonald’s Corp, November 9, 2020.)
Comparable sales—a critical measure of a restaurant company’s performance—slipped 2.2% globally. In the U.S., though, McDonald’s Corp’s comparable sales actually increased 4.6% in the third quarter.
The reality is that the restaurant business has changed because of the pandemic, but McDonald’s was quick to adapt to the new operating environment. “The resilience of the McDonald’s system was on display during the third quarter as the competitive strength of our business and the 3 D’s – Digital, Delivery and Drive Thru – led to significant global comparable sales recovery,” said the company’s chief financial officer, Kevin Ozan. (Source: Ibid.)
Bottom Line on McDonald’s Corp
With a business that has turned out to be much more resilient than the overall restaurant industry, McDonald’s Corp has received more investor attention. Year-to-date, MCD stock is up 8.6%.
Trading at $213.80 apiece, McDonald’s stock offers an annual dividend yield of 2.4%.
As it stands, the COVID-19 pandemic is not over yet. But, as perhaps the best dividend-growth stock in the restaurant sector, McDonald’s is well positioned to mail out more dividend checks to its shareholders.