(NYSE: MCD ) After a prolonged period of disappointing growth, McDonald's (NYSE: MCD ) is showing signs of life. For several quarters, it looked as though competitor Chipotle Mexican Grill (NYSE: CMG ) and burger rival Wendy's (NASDAQ: WEN ) were voraciously eating McDonald's lunch. Indeed, the evidence was mounting that McDonald's declining sales were the direct result of a loss of connection with its customers.
But McDonald's isn't going down without a fight. All along, it's insisted it still holds a powerful brand and the ability to generate huge amounts of cash flow. And now, it's putting its money where its mouth is.
McDonald's just announced a massive capital-return program to unfold over the next two years. It's going to shower cash on investors in the years ahead through both dividends and share repurchases. That's why when it comes to shareholder treatment, you should be lovin' McDonald's.
Positive momentum building
The past few months have seen a resurgence in McDonald's financial performance. Its global comparable-store sales, which measure sales at restaurants open at least one year, rose by 0.5% in the first quarter. The trend accelerated in April, when the company posted a 1.2% increase in global comparable-restaurant sales.
On both occasions, the emerging markets led the way. McDonald's Asia/Pacific, Middle East, and Africa (APMEA) segment posted comparable-restaurant sales growth of 0.8% and 2.9% in the first quarter and in April, respectively.
These kinds of growth rates might not seem overly impressive, especially considering how quickly McDonald's peers are growing. Indeed, Chipotle's comparable-restaurant sales jumped 13% in the first quarter. The increase in same-store sales in the first three months of the year was due to higher traffic as well as an increase in the average check size.
Likewise, Wendy's same-store sales increased approximately 2% last year and then by 1.3% in the first quarter. Wendy's owes its success to its revamped product offerings. In the past year, the company began its 'Right Price Right Size' menu, which has invigorated both sales and customer traffic.
As a result, you might not find much in McDonald's recent performance to whet your appetite. McDonald's isn't a growth story like Chipotle or a turnaround story like Wendy's. But it doesn't need to be. After all, McDonald's is a $100 billion company by market capitalization. That's more than five times the market caps of Chipotle and Wendy's put together.
McDonald's doesn't need to ring up huge comparable-restaurant growth to deliver impressive returns. It can rely on its massive scale and world class brand to do the heavy lifting. Even modest comparable-restaurant sales growth is enough to generate strong profit growth as a result of cost controls and share buybacks.
McDonald's is simply doing what it does best: producing reliable, stable growth and returning a lot of cash back to shareholders.
The plan to win
On May 28, McDonald's announced a three-year plan to return $18 billion-$20 billion to shareholders by 2016 through a combination of dividends and share repurchases. This represents a 10%-20% increase in the level of cash returned to investors between 2011-2013. With this in mind, you can bet there's a sizable dividend increase on the way.
In addition, McDonald's separately stated it would refranchise at least 1,500 restaurants located primarily in the APMEA and European regions. This reflects a greater-than 50% increase in the company's refranchising activity from the prior three-year period.
McDonald's strategy to return more restaurants to franchisees is a good one. The franchise model is far more lucrative to the company than owning restaurants directly. It allows McDonald's to collect stable streams of income without incurring the costs of maintenance and renovations since many of those expenses are passed down to the franchise operator.
The bottom line is that McDonald's is a cash-generating machine and plans to prove it going forward. It's going to significantly increase dividends and share buybacks going forward to provide shareholders with returns. Even greater returns are likely in the future, thanks to efficient cost controls, refranchising activity, and promising growth potential in the emerging markets.
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