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5 Tasty Facts About McDonald's New Dividend

By Demitri Kalogeropoulos - Sep 20, 2019 at 5:30PM

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The burger giant just became an even more attractive income investment.

McDonald's (MCD -0.21%) investors are getting a raise. The fast-food titan recently announced an 8% increase to its quarterly dividend, bringing the annual payout to $5 per share.

Given its long track record of annual raises and its improving operating trends over the past few years, the boost wasn't much of a surprise. But there are still a few facts about the dividend that investors might not know.

A man about to take a bite of a burger.

Image source: Getty Images.

1. It's the chain's 43rd consecutive dividend increase.

The 8% dividend boost follows last year's 15% hike and marks McDonald's 43rd straight year of issuing annual payout raises, stretching back to when the chain initiated its quarterly dividend back in 1976. The fast-food industry has gone through plenty of upheaval over that time, and the pace of change has only sped up in recent years (although the 50-year anniversary of the Big Mac last year shows how some tastes are remarkably stable).

McDonald's remains an industry leader today, mainly thanks to its flexible operating approach. In just the last few years, for example, investors have seen the chain dramatically reduce the level of corporate-owned restaurants, roll out fundamental ingredient and food preparation changes, and introduce sweeping updates to its stores and menu options.

2. McDonald's can afford it.

The increase brings the annual payout to roughly $3.6 billion, which is less than half of the $9 billion of operating income McDonald's earned last year. The payout ratio is similarly strong when you compare it to bottom-line profits. The dividend represents about 61% of last year's net income, and that percentage is likely to fall in fiscal 2019 given the chain's earnings surge.

3. It is part of a massive capital return plan that's set to refresh soon.

The dividend is a relatively small part of a huge capital return program that CEO Steve Easterbrook and his team outlined in 2017. Stock repurchases have played a bigger role in that initiative, which has already delivered $21 billion back to shareholders.

The combination of a higher dividend and steady buybacks should push that spending to $25 billion by the end of the year, and McDonald's investors can expect to see a new capital return program announced to replace this one in the months to come.

4. The dividend isn't taking away from store investments.

McDonald's dividend hikes in recent years haven't threatened to steal resources from the chain's elevated capital spending program. It is pouring nearly $2 billion into modernizing its U.S. store base in 2019, after all, in an initiative that management describes as the chain's biggest real estate investment to date.

It's good news for shareholders that Mickey D's can make historically large spending moves while still providing industry-thumping income growth.

5. The hike is a sign of management's confidence in its rebound plan.

Easterbrook and his team had a few attractive financial metrics to rely on when considering the magnitude of this year's raise. McDonald's sales growth has been consistently strong in international markets and its core U.S. segment is starting to come around, too, although customer traffic is still stuck in negative territory. Comparable-store sales growth accelerated in the most recent quarter, rising to an industry-leading 6%. The fast-food giant's operating margin, meanwhile, is soaring toward 45% of revenue thanks to its aggressive refranchising plan.

McDonald's still plans to spend cash on store remodels and bringing delivery to more of its U.S. locations in the next year. Yet its robust cash flow should easily support those investments while leaving lots of excess resources to direct toward stock buybacks and an increasing dividend payment.

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