Global fast food giant McDonald's (MCD) announced that it will increase its quarterly cash dividend 5% to $0.81 per share--an annual run-rate of $3.24 per share. This is in-line with our prediction that McDonald's next dividend increase would be 5% to $3.24 per annum. Interestingly, this will be the second consecutive year that McDonald's increased its dividend at a single-digit pace.
Why is the dividend growth so depressed?
McDonald's only grew revenue 2% year-over-year during its most recent quarter, while earnings per share were 5% higher than the year-ago period. McDonald's is relatively conservative in terms of capital allocation, so we aren't surprised the company has opted to increase its dividend just 5%. We think the firm wants the flexibility of making dividend payments without having to dip into the cash coffers or taking on additional capital. Truthfully, we'd be more disappointed if McDonald's decided to stretch itself to increase the payout than we are with the 5% growth rate.
On the bright side, McDonald's is showing some signs of life thanks to new products such as the Mighty Wings and the Steak, Egg, and Cheese Biscuit, as well as the Blitz Box that is undergoing testing in Kansas City. New products could spur some earnings growth, which in turn would be very positive for dividend expansion.
McDonald's modest dividend increase shouldn't be viewed in a negative light from a capital allocation standpoint; the firm couldn't comfortably increase its dividend much more at this time without increasing its dividend risk profile. Still, McDonald's lackluster earnings growth should be of concern, and it is the primary reason why we continue to avoid the firm in the portfolio of our Dividend Growth Newsletter.