Dividend Investors Shouldn't Worry About McDonald's

McDonald's (NYSE: MCD) fired its former CEO Steve Easterbrook because he violated company policy by having a consensual relationship with another employee. The board of directors really had no choice, as its rules were clear and did not offer any loopholes that would allow an exception.

Losing Easterbrook comes as a blow to investors. As CEO, he reversed the company's fortunes by embracing technology, adding delivery, and modernizing stores. That has steadily paid off with strong comparable-stores sales including a global increase of 5.9% in the most recent quarter, which also saw U.S. sales jump by 4.8%. Easterbrook himself celebrated these numbers in McDonald's third-quarter earnings release days before being fired.

"Our third-quarter performance was strong, and broad-based momentum continued with our 17th consecutive quarter of global comparable sales growth," he said. "Globally, our customers are rewarding our commitment of running better restaurants and executing our Velocity Growth Plan by visiting more often."

Losing a CEO who has led this type of turnaround would normally be a reason for investors to panic, but McDonald's shareholders have nothing to worry about.

A McDonald's location

McDonald's has changed CEOs, but investors should not be worried. Image source: McDonald's.

Here's how McDonald's makes money

McDonald's gets more than half of its sales through collecting fees on franchised restaurants. Through three-quarters of the year, it reported $8.6 billion in revenue from franchisees and $7.05 billion from company-operated stores.

That split protects the company and its shareholders from risk. It's not immune to sales trends, but over half of its business comes from franchisees taking risks on the expense side. The same benefit extends to its expensive efforts remodeling stores to its Restaurant of the Future model.

McDonald's may help with financing, but the cost falls to franchisees. That's great for shareholders who get the benefit of those improvements while the company keeps its cash free for other uses. One major use has been paying back shareholders through its dividend and with share buybacks.

"The Company returned $2.4 billion to shareholders through share repurchases and dividends," according to the Q3 earnings release. "This brings the cumulative return to shareholders to $22.5 billion against our targeted return of about $25 billion for the three-year period ending 2019. In addition, the Company announced an 8% increase in its quarterly dividend to $1.25 per share beginning in the third quarter of 2019."

I'm loving it

Easterbrook did the heavy lifting. He took a company that could have taken a business-as-usual approach and dragged it into the modern world. Many franchisees fought those changes because of the expense involved. Now, however, just a few years after the plan began, it seems prescient. Delivery -- which seemed like a pretty bad idea -- has proven very successful and has arguably become a table stakes concept for any restaurant chain.

New CEO Chris Kempczinski comes to the top job from his post running the chain's U.S. business. He does not have to reinvent the wheel or make a major pivot. Instead, he has to keep investing in technology and remain focused on improving the customer experience.

"He has the right mix of skills and experience to lead us forward having run our U.S. business, where franchisees are delivering strong financial and operational results, and overseen global strategy, business development, and innovation," said McDonald's Chairman Enrique Hernandez Jr. in a press release. "In particular, Chris was instrumental in the development of the Company's strategic plan, which has enabled global growth and leadership, and has overseen the most comprehensive transformation of the U.S. business in McDonald's history."

Kempczinski has essentially been there and done that. The hardest part -- getting franchisees on board -- has already happened. There will be bumps in the road, but the new CEO merely has to follow a course that has already been charted. If he does, and there's every reason to believe that he will, then the chain's dividend should be steady for years to come.

10 stocks we like better than McDonald's
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and McDonald's wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks


*Stock Advisor returns as of June 1, 2019


Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.