McDonald's Dividend

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On Wednesday, McDonald's (NYSE: MCD) announced a 70% increase in its annual dividend, from 23.5 cents per share to 40 cents, for a total payout of approximately $500 million. The dividend, payable Dec. 1, yields about 1.7% at McDonald's current price of $24.

Some investors were disappointed, however, as several analysts had forecasted a doubling of the dividend. But by withholding some cash, McDonald's better positions itself to create shareholder value by maintaining some financial flexibility. To further this flexibility, the company made plans earlier this year to cut back on $800 million in capital expenditures.

According to McDonald's CEO Jim Cantalupo, the company had paid down $400 million in debt this year through June 30. By paying out $0.40 instead of the analyst estimated $0.47 per share, McDonald's retains an extra $87.5 million to further pay down debt or even buy back more shares, which more efficiently returns value to shareholders.

While the stock isn't cheap at 19 times free cash flow, the company is in good shape. The business has turned around recently, with five consecutive months of positive same-store sales following 13 consecutive months of declines. So, while the dividend increase may have disappointed, it is still a sign of better days for McDonald's.

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You can reach Jeff Hwang at JHwang@Fool.com.