McDonald's (NYSE:MCD) has been circulating the news of late for all the wrong reasons. The biggest story being the recent scandal of expired meat in China. The Chinese distributor, Shanghai Husi Foods, was claimed to be selling expired meat and chicken to McDonald's outlets in China. On the 20th of July this year, McDonald's announced that they had ended their partnership with this distributor. The move helps McDonald's protect itself from future quality issues from China and to minimize this impact on future relations with both China and global customers.
During the month of July, McDonald's delivered sales our of Asia Pacific, Middle East and Africa (APACMEA). Sales in this region plunged 7.3%, while global sales fell by 2.5%, recording the worst global same store sales performance over the past decade. As competition for this fast food chain has increased in the US, comparable store sales figures have dropped by 3.2% in July, leading to lower market share.
On August 8th 2014, McDonald's closed down by 0.3% at $93 per share. This was a steep plunge after the share value reached $103.78 in mid-2013. The stock was also on the way to suffer from a seventh-straight weekly decline. At this point the experts believe that the stock has become undervalued, appealing, and it is an attractive price point for McDonald's, the fast-food giant operating around 35,000 restaurants in 115 countries.
McDonald's relationship with shareholders, and the math to back it up.
Over the past decade, dividends for McDonald's have been increasing at a rapid rate. It has a Compound Annual Growth Rate (CAGR) of over 20%. This was achieved by improving the payout ratio and by raising earnings through revenue growth and margin expansion. In the fiscal year 2014, McDonald's had an operating margin of 18.6% and out of its net income 30.7% was paid as dividends to the shareholders. Whereas in the fiscal year 2013, McDonald's had an operating margin of 31.2% and 56.2% of the net income was given out as dividends.
The operating margins and the payout ratios are unlikely to go any higher than this rate therefore it is possible that the investors would no longer receive dividend growth of this nature. But this does not lead to the conclusion that investing in McDonald's stock is worthless. Instead, the stock has become more compelling for investors due to the current fall in the prices of its shares. Since late 2009, the highest dividend yield for its stock has been observed currently reaching about 3.45%.
To improve its dividend growth McDonald's will have to work on its earnings growth. This will be accomplished by a rise in revenue growth, but due to the recent store sales figures which resulted to be low it is expected that revenue growth will also be low and might even reach negative figures in the future. However, McDonald's still achieves store growth of approximately 4% annually, as it opens about 1,500 restaurant outlets every year.
McDonald's has performed inadequately in the past few years and has suffered from low market share due to increased competition both locally and in foreign markets. Innovations regarding the marketing strategies have been comparatively poor. But despite competitive pressures in the global market, McDonald's has a major brand and scale advantages that remain intact to this day.
Can McDonald's pull through?
The world's largest chain of fast food restaurants has proved itself strong enough in the past as well to tackle such problems. They have handled these situations through innovations in the menu, improvements in the food quality and promotional marketing campaigns. McDonald's has a strong-brand image and it benefits from convenient locations of its restaurant. It is also advantage by its unparalleled advertising and bargaining scale and by its organized franchise system which operates worldwide.
McDonald's has an international presence that is of significant value. The company has decided to improve its competitive focus both locally and internationally therefore experts' claim that is expected that McDonald's will recover in 2014. The company has recently made statement saying that they plan to recover the market share that they have lost due to competition and also work on regaining customer confidence especially in China and the Asian/Pacific region. Moreover, they have increased order from other existing suppliers and are in search of new meat suppliers too, so as to meet the demand.
Although this leading global food service retailer is attempting to regain its position by creating innovative menus and improving its marketing campaigns, it is still quite exposed to domestic and international competition, frail economic environment and poor consumer confidence particularly in the U.S. As McDonald's looks to drive top line growth through expansion into unsaturated markets the company will reduce its dependence on North America by diluting it's portfolio in emerging countries.
The recovery from the latest setback in China could also take a few months thereby harming international sales and possibly putting new locations on hold. These are some serious problems for the company to deal with but there is no doubt that they can be fixed. McDonald's can still develop its business in new emerging markets, developing countries, and has the capacity to expand and stabilize its dividend for shareholder satisfaction. In accordance with the current low share prices for McDonald's stock, it appears to be extremely attractive for investors.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.