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Is McDonald’s Corporation (MCD)’s Cooked… Or Serving Up More Dividends?

We keep hearing about the demise of McDonald’s Corporation (NYSE:MCD). Now, there’s no doubt that the company has faced some challenges lately. Labor disputes, currency effects, questions over the food quality and nutrition, and changing consumer tastes have all coalesced to put the company – and its stock – in a precarious position.

McDonald's Corporation (NYSE:MCD)

Same-store sales are down regularly and marketing initiatives haven’t connected well with consumers. But let’s not forget that this is a $91 billion company that franchises and operates a combined 36,000+ restaurants across 125 countries. Let’s also not forget that people have to eat. As long as McDonald’s continues to conveniently provide good food at a great value, they’ll very likely continue to sell billions of dollars’ worth of cheeseburgers, fries, and beverages.

So let’s talk about that demise. What does that demise look like for the stock? Well, first the long-term performance: McDonald’s total return over the last 10 years is an annualized 16.64%. That obviously trounces SPY’s 10-year annualized 7.71%.

Short term? The stock is up 1.46% YTD. The S&P 500 is roughly flat. So that’s the demise of MCD’s stock. We now see that there’s perhaps just a little hyperbole involved there.

What about the company’s performance? That’s ultimately what matters most. Stock prices go up and down, but long-term business performance is what will ultimately drive returns. And it’s growing earnings that will fuel growing dividends. Using that same 10-year time frame as above, we can see revenue grew from $20.460 billion to $27.441 billion from fiscal years 2005 to 2014. That’s a compound annual growth rate of 3.32%.

Top-line growth isn’t particularly impressive, though the company is a victim of its own success: It’s somewhat difficult to grow from such a large base, especially at a meaningful rate. But per-share profit growth is more impressive. earnings-per-share increased from $2.04 to $4.82 over this period, which is a compound annual growth rate of 10.02%. However, growth over the last five years has slowed markedly.

Improving margins and a substantial reduction of the outstanding share count drove a lot of that additional bottom-line growth. Shares outstanding have been reduced by over 20% over the last decade. That means there’s 20% less shares across which to spread out the remaining profit.

S&P Capital IQ anticipates that earnings-per-share will grow at a 7% compound annual rate over the next three years, which, while lower than what we saw over the last decade, is nowhere near a company on the brink of failure. That’s still a pretty solid growth rate. However, what makes this stock really attractive right now is the 3.6% yield. That’s about 160 basis points higher than the broader market – a significant difference. Add that 3.58% yield to the 7% expected underlying EPS growth, and you have the recipe for pretty solid returns moving forward.

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