McDonald's (MCD) has been one of the better large-cap growth stories over the past seven years. Since 2006, the price of the stock has risen from $31.70 to the present price of $95.00 as the earnings have grown from $1.97 to $5.36 (the P/E valuation of the stock has hardly budged, moving from an average of 16x earnings in 2006 to a valuation of 17-18x earnings today). The stock has been a real treat for income investors as well, as the robust earnings per share growth has enabled the company to raise the dividend from $1.00 per share over the course of 2006 to a current annual payout of $3.08.
When the discussion of McDonald's performance over the past seven years comes up, the conversation immediately turns to the fact that the stock price and dividends have roughly tripled over that time frame (depending on whether your primary emphasis is stock price growth or annual income growth). But what usually gets less attention is the fact that McDonald's has been steadily reducing its share count every year since at least 1996, except for the 2003-2004 period. To continue with the 2006-2013 time frame that I have chosen to focus on, we can see that McDonald's has reduced its share count from 1.2 billion in 2006, with estimates indicating that the company will have around 975 million shares outstanding by the end of 2013 (the current share count for McDonald's is hovering around one billion).
While the fact that McDonald's has reduced the share count by about 20% over the past six or seven years may not initially seem like something to be excited about, the fact presents itself that McDonald's has run a highly efficient buyback program, making sure that the money goes directly to retiring shares (as opposed to mopping up share dilution as a result of executive compensation). Additionally, the company management has a solid record of not overpaying to retire the shares. I'll give you some hard numbers to illustrate what I'm talking about:
- First off, over 90% of the company's funds have actually gone towards retiring shares, as opposed to offsetting share dilution. This company ranks up there with Wal-Mart (WMT) as a company that actually makes sure that funds allocated to buybacks actually go towards retiring the shares.
- Over the 2007 and 2008 year period, McDonald's bought back 140 million shares, paying an average price of slightly over $54 per share to take them off the market. Shares traded between $42.30 and $63.70 during this period.
- In 2009, during a period of great economic uncertainty that accompanied the stock market collapse, the company bought back 50 million shares at an average price of $56.74. In much the same way that an income investor screens a dividend growth investment by checking to see whether the company raised its dividend during the 2008-2009 period, I screen a company with a stock buyback program to see whether the company continued executing stock buybacks when prices hit new lows. Although the McDonald's buyback was smaller in 2009 than it was in 2007-2008, I find this tolerable for three reasons: (1) the company chose to raise its quarterly dividend from $0.375 to $0.50 to reassure jittery investors by providing them a nice raise in cold hard cash, (2) the company chose to raise its cash position and pay down some of its high-interest rate debt at the time, and (3) the price of McDonald's stock held up resiliently well during the recession, as the stock traded in a similar $50-$63 range in both the pre-recession year of 2007 and the recession year of 2009.
- In 2010 and 2011, the company took 78 million shares off the market, paying an average of slightly over $75 per share. During this period of time, the company's shares traded between $61 and $101. Because the stock hit a high of $101 in 2011, I am happy to see that the company slowed down its buyback when the 2011 share price traded at over 21-22x earnings the previous year's earnings (note: over the past ten years, McDonald's has typically had a P/E ratio of around 16-17x earnings, indicating that the 21-22x earnings figure might signal a period of historical overvaluation).
- To my knowledge, McDonald's has not yet released an exact average buyback price for 2012, but my back-of-the-envelope calculations that I parsed together from available data indicate a repurchase price likely between $92 and $95.
In many respects, McDonald's is quite similar to the Chevron (CVX) case study that I posted a month or so ago. Both companies have records and the continued capacity to raise dividends and grow earnings by a high-single digit clip, facilitated by the reduction in share count that an intelligently conceived buyback program can provide. The earnings growth, dividend growth, and stock price growth of McDonald's has rightfully gotten most of the attention over the past seven years, but the steady buyback program has played a meaningful role in enabling all three. The company is not buying back "massive" amounts of stock (it's a $95 billion company that typically retires $3-$5 billion worth of stock per year), but when the company does buy back shares, it is generally at an intelligent price and actually reduces the share count.
Disclosure: I am long MCD.