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Craving dividends? McDonald’s satisfies

John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

One of the chief strengths of McDonald's as a global brand is its consistency: Whether you order a Big Mac in Toronto, London or Shanghai, you know exactly how it's going to taste.

But as an investor, what I find especially appetizing about McDonald's is the consistency of its dividend hikes.

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Since the burger giant declared its first cash payment in 1976, it has raised its dividend for 36 consecutive years – through recessions, wars, currency crises, the U.S. housing meltdown and assorted other financial shocks.

It's gotten to the point where any dummy can see these annual dividend increases coming – even me.

In my inaugural Strategy Lab column, I offered to bet anyone a box of McNuggets that Mickey D's would raise its dividend this month.

Sure enough, on Sept. 20, the company hiked its quarterly payment to 77 cents (U.S.) from 70 cents – a 10-per-cent jump. Based on Tuesday's closing price of $92.86 and the new annual dividend of $3.08, the stock now yields a juicy 3.3 per cent.

Unfortunately, nobody took me up on my wager, but as a McDonald's shareholder (I own the stock personally and in my Strategy Lab model portfolio) I'm not complaining.

McDonald's typifies what I look for in a dividend investment: a company with an entrenched position, strong brand name, good growth potential, above-average yield and steadily rising cash flow to fund regular dividend increases. A shareholder-friendly attitude is also a big plus.

As chief executive officer Don Thompson said in announcing the latest dividend increase, McDonald's uses its growing profits both to fuel expansion and to reward shareholders. In other words, McDonald's isn't a growth stock or an income stock – it's both.

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"Our philosophy on the use of capital remains unchanged with our first priority being to reinvest in our business to drive sales and cash flow, while generating strong returns. After these investment opportunities, we expect to return all of our free cash flow to shareholders over the long-term through dividends and share repurchases," Mr. Thompson said.

Bearing in mind that past performance isn't necessarily indicative of future returns, investing in McDonald's has certainly hit the spot.

Over the past 10 years the stock price has appreciated by an annual equivalent of 17.7 per cent. Including reinvested dividends, the annual gain has been a scorching 20.9 per cent, compared with about 7.8 per cent for the S&P 500.

To put McDonald's performance into dollar terms, if you'd invested $10,000 in the shares back in September, 2002, and reinvested all dividends, today you'd be sitting on $66,361. That's a lot of Big Macs.

I wouldn't necessarily expect such supersized returns to continue over the next 10 years. After all, the company's largest market, Europe, is mired in recession, and the chain is also facing rising ingredient costs and intense competition.

That said, I expect McDonald's revenues, profits and dividends to climb steadily, given the chain's track record of menu innovation, the rollout of McCafés and expansion in Asia and elsewhere.

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How much will the dividend grow? Jack Russo, an analyst with Edward Jones, estimates that it will climb by about 8 per cent annually over the next five years – roughly in line with earnings growth.

If he's right, by 2017, McDonald's will be paying $1.13 a quarter or $4.52 annually – about 47 per cent higher than its current dividend.

Normally, stocks that deliver such consistent performance command a premium. But McDonald's is trading at a reasonable 15.5 times 2013 estimated earnings of $5.97 a share. For 2012, the Golden Arches is expected to earn $5.42 a share on revenue of about $27.5-billion.

Bottom line: If you're hungry for dividends, McDonald's deserves a look.

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About the Author
Investment Reporter and Columnist

John Heinzl has been writing about business and investing since 1990. A native of Hamilton, he earned a master's degree from the University of Western Ontario's Graduate School of Journalism and completed the Canadian Securities Course with honours. More

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