But what really juices the prospects is the dividend growth: McDonald’s Corporation (NYSE:MCD) has increased its dividend for the past 39 consecutive years. McDonald’s is the only restaurant stock that is a Dividend Aristocrat. That’s almost four decades. That time frame includes the massive inflation of the early 80s, the savings and loan crisis, multiple wars, the financial crisis, and the Great Recession. So if you’re looking for durability and consistency, look no further than McDonald’s.
What’s perhaps just as impressive as the length of dividend growth streak is the rate at which the dividend is growing. Over the last decade, the dividend has increased at an annual rate of 19.6%. However, like recent EPS growth, the dividend hasn’t increased as fast over the last five years.
Part of the reason the dividend hasn’t grown much lately – besides the lack of underlying profit growth over the last five years – is the fact that the payout ratio now stands at 76.4%. That means for every $1 in profit the company takes in, they’re sending out a little over 76 cents to shareholders in the form of a dividend. The other ~23 cents is retained by the company to continue growing.
That’s a very high ratio, which limits the potential for future dividend raises because the company is already retaining somewhat little profit to reinvest back into the business. That huge dividend growth we see above has come at the cost of a payout ratio that’s doubled over the last decade, so it’s something to be mindful of in terms of one’s expectations moving forward.
One other area of the company that does concern me a bit is the balance sheet. While not necessarily worrisome in and of itself, it has deteriorated some over the last decade. This is a somewhat common sight among a lot of companies because cheap debt has made it easy for companies to leverage up and potentially boost returns to shareholders. But McDonald’s balance sheet has deteriorated while growth has simultaneously slowed.
The long-term/debt equity ratio is 1.17 and the interest coverage ratio is approximately 14. Again, not bad numbers, especially relative to the industry, but I think there’s room for improvement there. However, McDonald’s profitability really shines bright. Over the last five years, the company has averaged net margin of 19.59% and return on equity of 35.58%. Really incredible numbers here, especially the margin. However, both metrics have been slipping as of late. That’s something to keep an eye on.
Fundamentally, the company is in good shape. There has no doubt been some chinks in the armor lately, though. Growth is essentially flat over the last five years, margins are slipping, the balance sheet has deteriorated some, and global comparable sales decreased by 0.3% in May 2015 – another disappointing sales report in a long line of them.
