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McDonald’s Corporation (MCD), Burger King Worldwide Inc (BKW), Mastercard Inc (MA), Visa Inc (V): Stocks for the Dividend Investor, Part 4: Future Potential

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In part one of this series, I looked at two solid dividend stocks that would provide a decent backbone for any portfolio. In the second part, I looked at the high yield sector and in part three, I looked at two companies that offered the potential for capital growth as well as a strong dividend payment.

In this final part, I am going to look at three companies that have strong fundamentals for increasing future dividend payouts.

The other burger joint

McDonald’s Corporation (NYSE:MCD) offers investors some of the best returns around, the company returns most of its net income to shareholders every year through both buybacks and dividends. However, for the future I believe investors should look to McDonald’s’ smaller competitor, Burger King Worldwide Inc (NYSE:BKW).

McDonald's Corporation (NYSE:MCD)

Burger King shares many of McDonald’s Corporation (NYSE:MCD) strong fundamentals and the company’s cash generative nature. Indeed, Burger King Worldwide Inc (NYSE:BKW) has a gross margin of 79% compared to McDonald’s’ gross margin of 39%, but McDonald’s has a net margin of 20%, while Burger King’s is 6%. Moreover, McDonald’s’ shareholder payouts are only just covered by operating cash flow Burger King Worldwide Inc (NYSE:BKW)’s has plenty of free cash for further payout increases.

Metric McDonald’s BKW 2011 BKW 2012
Operating cash flow $6,970 $406 $224
Investing cash flow -$3,200 -$41 $34
Dividends $2,900 $7 $14
Dividend cover by cash flow (operating-investing) 1.3x 52x 18x
Free cash flow $1,020 $316 $104

2012 was a relatively poor year for Burger King Worldwide Inc (NYSE:BKW), however, the company still produced a larger free cash flow as a percentage of operating cash flow than McDonald’s Corporation (NYSE:MCD). Indeed, during 2012 the company converted just under 50% of its operating cash flow into free cash flow. Furthermore, the company’s dividend payout is covered 18 times by operating cash flow after the deduction of investing activities. McDonald’s Corporation (NYSE:MCD) on the other hand, converted a smaller portion of its operating cash flow into free cash flow and its dividend is only covered slightly more than once by operating cash flow, after the deduction of investing activities.

Burger King Worldwide Inc (NYSE:BKW)’s high cash conversion ratio leads me to believe that shareholders will be in-line for growing returns in the future.

Plastic is the new cash.

Two other companies that I believe are set to significantly improve shareholder returns in the future are the highly cash generative card payment-network providers Mastercard Inc (NYSE:MA) and Visa Inc (NYSE:V)

MasterCard and Visa have a virtual monopoly across the world and will always have plenty of customers. Moreover, because they are not involved in the process of lending money to customers, neither company has any real credit risk. Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) just process transactions and take a fee, a lucrative and almost risk-free business model.

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