Last update on 2024-06-25

McDonalds (MCD) - Dividend Analysis (Final Score: 8/8)

Discover McDonald's (MCD) robust dividend performance with an 8/8 score, showcasing strong and stable dividend policies. Learn about its growth, yield, payout ratio, and more.

Short Analysis - Dividend Score: 8

We're running McDonalds (MCD) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

McDonald's dividend analysis shows robust and stable performance over the last 20 years based on an 8-criteria scoring system, achieving a perfect score of 8. Key points include: a dividend yield (2.1011%) significantly higher than the industry average (0.93%); a strong average annual dividend growth rate (18.32%); a conservative average payout ratio (55.17%); well-covered dividends by earnings and free cash flow; stable and consistently increasing dividends ($0.4 in 2003 to $6.23 in 2023); a 25+ year history of dividend payments; and consistent stock repurchases reflecting solid cash generation and commitment to shareholder value.

Insights for Value Investors Seeking Stable Income

Based on the analysis, McDonald's (MCD) demonstrates strong financial health, effective dividend management, and a focus on shareholder returns. For investors seeking reliable dividend income and long-term growth, MCD is an attractive stock to consider. The company's consistent dividend payments, coupled with substantial share repurchases, signify a stable and profitable investment opportunity.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield is critical for income-focused investors as it measures the annual dividend income relative to the stock price.

McDonald's current dividend yield of 2.1011% is significantly higher than the industry average of 0.93%. This trend is favorable as it indicates McDonald's commitment to returning value to its shareholders. Historically, McDonald's dividend yield has been relatively stable, showing resilience even during market downturns. For example, in 2008 during the financial crisis, the yield was 2.613%, compared to a mere 1.19% industry average, illustrating McDonald's financial robustness. Though the yield has slightly fluctuated, it remains higher than industry standards, making it an attractive option for dividend investors. Additionally, the stock price appreciation from $24.83 in 2003 to $296.51 in 2023 shows a compounded annual growth rate (CAGR) of ~11.7%, which, alongside a solid dividend yield, presents a compelling total return story.

Average annual Growth Rate higher than 5% in the last 20 years?

The Dividend Growth Rate indicates the annual percentage rate at which a company’s dividend payments have increased over a specified period. A rate above 5% is considered strong.

Over the last 20 years, McDonald's has demonstrated varying levels of dividend growth rates with a mix of both high and negative percentages. The average dividend growth rate stands at 18.32%, which is significantly above the 5% threshold. This indicates that McDonald's has a strong ability to increase its dividend payments on average annually. Specifically, years like 2003 (70.21%) and 2006 (49.25%) show exceptionally high growth, although there were years of negative growth such as 2015 (-15.89%). On balance, however, the overall trend is positive, suggesting a robust and sustainable dividend policy. Given this historical performance, McDonald's dividend growth rate is indeed favorable.

Average annual Payout Ratio lower than 65% in the last 20 years?

The average payout ratio measures the proportion of earnings a company distributes to shareholders in the form of dividends. A ratio lower than 65% generally indicates that the company is retaining enough earnings to fuel growth or maintain financial stability.

McDonald's has had an average payout ratio of 55.17% over the last 20 years, which is notably below the 65% threshold. This suggests that McDonald's effectively manages its earnings distribution, balancing shareholder returns with reinvesting back into the company. Most years show consistent payout ratios well below the benchmark, particularly in earlier years like 2003 and 2004. However, periods such as 2017 and 2020 where the ratio approaches and surpasses 65% indicate moments of increased dividend distributions potentially in response to varying economic conditions or profitability metrics. Overall, this trend is positive as it demonstrates McDonald's commitment to sustainable dividend payouts while retaining ample earnings for operational needs.

Dividends Well Covered by Earnings?

This criterion measures how well the company's dividends are covered by its earnings. It is important as it shows the sustainability of dividend payouts, indicating if earnings are sufficient to meet dividend commitments. Higher coverage ratios are preferred.

For McDonald's (MCD), the Earnings per Share (EPS) and Dividend per Share (DPS) data indicate that the company's dividends were well covered by earnings over the past 20 years. The coverage ratio has generally stayed above 0.5, which signifies that at least 50% of earnings are used to cover dividends—even surpassing 1 in some years (indicating dividends are less than earnings). However, some caution is warranted due to certain periods (e.g., 2007 with a low EPS but higher dividends) where the ratio approached 0.75. Overall, McDonald's has consistently ensured earnings can cover dividends, reflecting strong financial health with few instances of concern.

Dividends Well Covered by Cash Flow?

Analyzing if dividends are well covered by free cash flow assesses the sustainability of dividend payments. Ideally, the ratio should be low to ensure dividends are easily financed.

Examining McDonald's free cash flow (FCF) and dividend payout amounts over the past two decades, the trend in the dividend coverage ratio reflects how comfortably dividends are covered by free cash flow. The ratios range from 0.297 in 2004 to a high of 0.835 in 2017, with the most recent value being 0.625 in 2023. A lower ratio indicates better coverage, with a ratio consistently below 1 suggesting dividends are well covered by FCF. Despite fluctuations, McDonald's has mostly maintained a ratio comfortably below 1, indicating robust coverage. However, a spike to 0.835 in 2017 and notable highs in 2012 (0.739) and 2014 (0.775) suggest periods of strained coverage, likely due to increased dividend payouts outpacing FCF growth. Recently, the ratio remains steady at about 0.625, pointing to improved coverage and a healthier cash flow. Overall, this trend indicates McDonald's has managed its payout well, with occasional periods of pressure. The recent trend is positive, suggesting strong cash flow generation supports its dividends adequately.

Stable Dividends Since the Company Began Paying Dividends?

Explain the criterion for McDonalds (MCD) and why it is important to consider

Stable dividends over an extended period are a cornerstone criterion for income-seeking investors. For McDonald's, the dividend per share history over the last 20 years shows a steadily increasing trend from $0.4 in 2003 to $6.23 in 2023. This performance indicates a strong and consistent capital distribution policy. Moreover, there was no instance where the dividend per share dropped by more than 20% in any given year throughout this period. This stability signals McDonald’s commitment to returning value to shareholders, making it a reliable income-generating stock. Such consistency can significantly benefit long-term investors focusing on stable income.

Dividends Paid for Over 25 Years?

Examining a company's history of paying dividends for over 25 years shows its commitment to returning value to shareholders, financial stability, and consistent earnings power.

McDonald's has a strong track record of paying consistent and growing dividends over the past 25 years, highlighted by the listed dividend per share values. This long history not only adds to its attractiveness as a dividend stock but also demonstrates solid financial health and profitability. Notably, since 1998, McDonald's has increased its dividend per share from $0.176 to $6.23 in 2023, showcasing an impressive commitment to rewarding shareholders and suggesting robust earnings and efficient management.

Reliable Stock Repurchases Over the Past 20 Years?

Explain the trend of share repurchases for the past 20 years for McDonalds and why it is important to consider.

Reviewing the trend of McDonald's share repurchases over the past 20 years, it is evident the company has consistently reduced its number of outstanding shares. Beginning with 1.276 billion shares in 2003 and reducing systematically to around 727.9 million shares by 2023 demonstrates a notable commitment to share repurchase programs. That's an average reduction rate of approximately -2.744% annually. The trend indicates McDonald's consistent, reliable buyback performance, which often reflects a company's strong cash generation capability and a commitment to returning value to shareholders. Given this, the trend can be considered positive; consistent buybacks can uplift earnings-per-share (EPS) and investor sentiment. Such financial strategies are typical of stable, established firms focusing on enhancing shareholder value.