Dow Dividend Aristocrat: McDonald's

An in-depth look at Dow dividend aristocrat McDonald's, including its dividend raises, share price performance, and prospects for remaining in this elite club.

Jan 23, 2014 at 4:32PM

Over the past few weeks I have been working my way through the nine dividend aristocrats -- companies that have paid and increased their dividends for 25 consecutive years -- encompassed within the Dow Jones Industrial Average (DJINDICES:^DJI), and today I will be discussing McDonald's (NYSE:MCD). The company's consecutive dividend streak started back in 1977, and the current dividend amount is $3.24, giving the stock a yield of 3.4%. While the 3.4% yield isn't currently the highest within the Dow, it is still well above the 2.4% the index is currently averaging.

But first, let's take a look at how McDonald's got here. Then we'll look at one big obstacle the company needs to overcome in the future.

The past
Over the past 36 years, McDonald's has increased its dividend by more than 14,360%. Although the chart below doesn't give you the whole time period, it shows the increases since 1986.

MCD Dividend Chart

MCD Dividend data by YCharts.

This chart immediately catches your eye when it spikes higher then drops in the mid 2000s. So you may be wondering how the company remained a dividend aristocrat after its dividend was cut in 2008.

The answer is simple. From 2000 through 2007, McDonald's paid a yearly dividend, rather than a quarterly one. This explains the massive jump during the 2000s. Then, in 2008, the company reverted back to paying a quarterly dividend; when the four payments in 2008 are added up, they amount to an increase over the yearly dividend paid in 2007.

So now that we know where the dividend has come from, what about the share price? While an increasing dividend amount is important, most investors want the best of both worlds -- dividend growth and share price appreciation.

MCD Chart

MCD data by YCharts.

As you can see, since 1977 the stock has risen 7,390% -- an impressive return that most investors dream of.

The future
As we often hear in the investing world, past performance is not a predictor of future results, so what can investors expect moving forward? First, McDonald's has a number of things going for it. It operates in a low-priced, consumer-focused industry. It sells a product that humans need to live -- not burgers and fries, necessarily, but food in general. This helps McDonald's survive and even thrive during times of economic turmoil.

That said, the company has begun to see sales and earnings growth rates slow in recent years, and to combat these weakening results, management has introduced new menu items to attract new customers and retain current ones. But those additional menu items have caused some growing pains.

McDonald's operates in the fast-food industry, and in order to remain competitive, it must prepare food in the speedy manner that customers expect. The addition of new menu options such as wraps, smoothies, and elaborate coffee-based drinks has slowed service. Management has addressed these issues, and in the future it plans to add new menu items at a slower pace while also improving training and food preparation within its restaurants to help with its current food-preparation problems.

Making the appropriate changes quickly enough to prevent the company from alienating customers will be the key to McDonald's success down the road. At this time, though, investors should be encouraged by the fact that a company of even McDonald's size is still finding ways to grow and improve. On the surface, McDonald's current issues with food prep times may seem to be a terrible problem, and rushing new items into production was a big mistake, McDonald's management could turn this roadblock into a great learning experience that can be used to help the company work through future expansion and growth.

Regardless, though, McDonald's current payout ratio of 55% can be increased if the company continues to struggle: The restaurant chain is no longer a rapidly growing organization that needs cash on hand to open hundreds of new stores or to reinvest heavily in its business. Current shareholders shouldn't fear that McDonald's will break its dividend streak anytime soon. They could even see bigger dividend boosts in the coming years if management fixes it food problems.

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Fool contributor Matt Thalman has no position in any stocks mentioned. Check back Monday through Friday as Matt explains what caused the big winners and losers of the day, and every Saturday for a weekly recap. Follow Matt on Twitter @mthalman5513.

The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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