McDonald’s (NYSE: MCD) shares hit another all-time high this week after announcing a major expansion in Southeast Asia.
McDonald’s plans to open 1,500 restaurants in China, Hong Kong and South Korea over the next five years. China is the focus of the build-out, with 1,300 of the new restaurants opening in that country. By 2020, McDonald’s expects to have 3,500 restaurants up and running in China.dividend growth investors
[ad#Google Adsense 336×280-IA]I’m long familiar with McDonald’s (as an investor). McDonald’s was the first recommendation for the High Yield Wealth portfolio in January 2011.
It remains a recommendation to this day.
So, how have McDonald’s investors fared over the past five years? Not bad.
Since my initial recommendation, McDonald’s shares have appreciated 68%.
Toss in the cumulative dividends – which amount to $15.28 per share – and the total return pops to 88%.
McDonald’s shares yield 2.8% on the current market price, but investors who have owned McDonald’s shares since January 2011 realize a 4.7% dividend yield on their cost basis price today.
The past six months have been especially remunerative. McDonald’s shares are up 28% since October. The S&P 500, in comparison, is up 7%.
Longtime McDonald’s investors haven’t always had it so good, though. In fact, they’ve had to endure nearly three years of disappointing financial results and lousy share-price performance.
McDonald’s entered 2012 with its shares trading at $100. As recently as October 2015, they were still trading at $100. During that time, they frequently languished around $90. Investors had to be content with collecting dividends (whose payout grew every year) while waiting for improvements.
During this stay in purgatory, my email inbox would fill with a variation of the same theme: Why are you keeping this dud? After all, the new kids on the block – Shake Shack (NYSE: SHAK) and Habit Restaurants (NASDAQ: HABT) to name a couple – were promoted as giant slayers.
This is where patience and a little experience come in handy.
I’ve been down this road before. McDonald’s has a history of slipping, catching itself, and then moving forward. In the early 2000s, quality suffered and so did the motivation of many of the franchise owners. Nevertheless, McDonald’s still earned money and still grew its dividend. The problems were eventually solved, and McDonald’s share price returned to an upward trajectory.
In the 2008 and 2009 quality again slipped and same-store sales languished. At the same time, McDonald’s endured three CEOs in as many years. Due to illness and death, a new manager was called off the bench and elevated to the top post. Each time, the new CEO was able to step up and perform.
But then McDonald’s slipped again. CEO Don Thompson was forced to “step down” in March 2015. Annual revenue under Thompson’s watch had shrunk to $27.44 billion, less than the revenue posted in each of the previous two years. Earnings per share had dipped to $4.83, less than each of the previous three years.
McDonald’s responded by elevating Steve Easterbrook, former head of McDonald’s UK, to CEO. Easterbrook has proven his mettle. Under his watch, same-store sales have recovered and growth has resumed, thanks in large part to new initiatives like the wildly successful all-day breakfast.
I expect Easterbrook’s big push into China will also pay off, even though McDonald’s China restaurants have underperformed in the past. This go around is different because the push includes more local ownership. The goal is to have 95% of the restaurants franchised. Franchise-owned restaurants are more profitable than company-owned locations. The corollary to more local ownership is more earnings. Don’t be surprised to see a bump up in earnings growth over the next four years.
Discipline is the moral of this vignette. Don’t be dissuaded when a quality dividend grower endures a rough patch. Every company endures a rough patch. Growth and financial performance are never linear, but when given a sufficient amount of time, wealth creation is.
— Stephen Mauzy
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Source: Wyatt Investment Research