McDonald’s: Golden Profits

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McDonald's (NYSE: MCD), the world's largest retail food chain, revealed this week that it plans to return $18 billion to $20 billion to shareholders between 2014 and 2016 through a combination of dividends and share repurchases. It's yet another sign that this company, which virtually invented the fast food concept, is still staying ahead of the competition.

Since bottoming out below $15 in January of 2003, the share price recently crested above $100 again, and now has a market cap of $100 billion. Yet it still trades at a price-earnings ratio of 18, about the same as the market (actually, a slight discount to the market) and pays a dividend yield of more than 3 percent. If you didn't know it was a restaurant and just looked at the financial stats, you might mistake it for a tech stock.

McDonald's has long been the leader in providing tasty food to people in a hurry. As Americans' tastes have shifted toward healthier fare in recent years, some analysts questioned McDonald’s ability to keep up with the times. But by expanding its menu with more salads and other healthy options, and adjusting its marketing accordingly, the Oak Brook, Illinois-based company has kept pace with the times.

The proof is in the numbers. The corporation recently announced that global comparable sales increased 1.2% in April over the same month in 2013. Even in a market with more fast food choices than ever, McDonald's has found a way to increase revenue.

The global reach of the company is a key factor here. Comparable sales were actually flat in the United States during April – not all that surprising considering the state of the economy (the government just reported that the U.S. economy actually contracted by 1 percent in the first quarter of 2014) and ea! ting out is always one of first things consumers cut back on.

So why did revenues increase overall? Because sales in the Pacific region, the Middle East and Africa were up 2.9 percent during that period. Europe’s comparable sales rose 0.3% in April as positive performance in the U.K. and France was mostly offset by negative results in Germany.

“We are strengthening our business plans by emphasizing customer-driven strategies,” said McDonald’s President and Chief Executive Officer Don Thompson.  “We remain focused on delivering an outstanding restaurant experience by serving our customers their favorite McDonald’s food and drinks and offering compelling value, choice and convenience to create easy, memorable experiences.”

The company has a long-term "Plan to Win" that involves using customer feedback to enhance brand loyalty. This means not only providing customers with their favorite food and drink, but also creating memorable experiences and offering unparalleled convenience.

Specifically, the firm aims to:

Return $18 to $20 billion to shareholders between 2014 and 2016 through a combination of dividends and share repurchases, representing a 10 percent to 20 percent increase over the amount of cash returned between 2011 and 2013;Refranchise at least 1,500 restaurants by the end of 2016, primarily in Asia/Pacific, Middle East and Africa (APMEA) and Europe, reflecting a more than 50 percent increase in refranchising activity compared with the prior three-year period; andAnalyze spending with the primary intent of reallocating resources to higher return initiatives and growth areas, including development of the company’s global digital capabilities.

“The actions we are taking to enhance long-term shareholder value fit squarely within our proven business model,” said Senior Executive Vice President and Chief Financial Officer Pete Bensen. During the past month, McDonald’s emphasized its popular breakfas! t options! complemented by a McCafé coffee promotion and introduced a new premium sandwich, the Bacon Clubhouse. Strong results in China were particularly important in producing the positive global numbers mentioned above.

McDonald's intends to refranchise at least 1,500 restaurants by the end of 2016, primarily in Asia/Pacific, Middle East and Africa and Europe. The company represents that this is more than a 50% increase in refranchising activity, compared with the prior three-year period.

McDonald's currently has a dividend yield of 3.2%. That's a serious payout for this market segment, and would be impressive just about anywhere except for the utilities sector.

Standard & Poor's analyzed the company's return-to-shareholders plan and said that the McDonald's credit ratings will not be impacted from the capital plan. S&P pointed out that McDonald's returned about $16.4 billion from 2011 to 2013.

The company also plans to monitor closely its general and administrative costs. The focus is to aim its G&A spending by reallocating resources to higher return initiatives and growth areas.

With one of the most recognized brand names in the world, and a solid track record of both capital gains and dividend yield, McDonald's remains an outstanding choice for investors.