McDonald's Has Levered Cash-Flow With Long-Term Debt Issuance

| About: McDonald's Corporation (MCD)

Summary

MCD's is in tough spot.

Company is paying out 3(x) its free-cash-flow to supplement capital return.

Long-term debt issuance has soared.

McDonald's (NYSE:MCD) is like a lot of other S&P 500 companies in that in this very low interest-rate environment, companies are using long-term debt to repurchase shares.

The problem, or issue, with McDonald's is that the burger giant is issuing a lot of it.

Here is the straight Statement of Cash-Flow table:

CFFO y/y gro capex y/y gro FCF y/y gro
6/16 $6.3 bl 1% $1.75 bl -19% $4.5 +12%
6/15 $6.2 bl -19% $2.18 bl -23% $4.0 -16%
6/14 $7.6 bl 9% $2.8 bl -6% $4.8 +19%
6/13 $7.0 bl 0% $2.99 bl +2% $4.0 -2%
6/12 $7.0 bl 3% $2.93 bl +20% $4.1 -7%
Click to enlarge
  • All dollar amounts trailing-twelve-months (NYSE:TTM)
  • CFFO - cash generated from operations
  • capex - new store openings and remodelings as well as long-term investments in the business
  • FCF - free-cash-flow
  • Source:10-Qs, annual reports

From this, readers should see the trend in capex, as store openings started to decline sharply, and how that helped stabilize or maintain free-cash-flow.

Now here is the real story:

FCF - Div's - Repo's = Surp/(NYSEARCA:DEF) New l-t debt Total l-t debt
6/16 $4.5 $3.1 $11.6 ($10.2) $2.65 $26 bl
3/16 $4.7 $3.2 $9.8 ($8.3) ($0.75) $23.35
12/15 $4.7 $3.2 $6.1 ($4.6) $6.1 bl $24.1
9/15 $4.4 $3.2 $5.6 ($4.4) $0 $17.99
6/15 $4.0 $3.2 $4.1 ($3.3) $3.6 bl $17.90
6/14 $4.8 $3.1 $2.3 ($0.6) $1.5 bl $15.3
6/13 $4.0 $3.0 $2.1 ($1.1) $0.57 $13.4
6/12 $4.1 $2.8 $2.9 ($1.6) $0.665 $12.72
Click to enlarge

Source: earnings reports, 10-Q's, 10-K's, etc

Readers are taken through the math of how free-cash-flow generation provides for dividends and share repurchases that are used to return capital to shareholders and how that capital return is being leveraged or goosed (supplemented?) with term debt issuance.

Two important metrics for MCD:

Capital retn'd as % FCF Div as % FCF Debt-to-cap ratio
6/16 325% 69% 98%
3/16 274% 67% 86%
12/15 197% 68% 77%
9/15 199% 73% 68%
6/15 182% 80% 63%
6/14 112% 66% 49%
6/13 125% 74% 47%
6/12 139% 66% 48%
Click to enlarge

Source: spreadsheet, from earnings reports, 10-Q's

The one surprising aspect about the above metrics is that the dividend in total dollars is consuming such a large percentage of total free-cash-flow.

Normally companies like to keep that percentage below 50% to allow for some dividend growth.

Again, if you look at the first column "capital returned" readers can see that all the free-cash-flow and then some is being out to shareholders to support earnings per share.

Conclusion: I would venture to guess that all of the move in MCD's stock from September, 2015 to mid-2016 or a $30 increase was due to returning capital to shareholders and very little had to do with operational improvement.

The thing is MCD can still continue to reduce capex and then use that additional free-cash-flow to repurchase stock that wouldn't be funded with debt issuance, but cutting capex is "cutting bone" for sure.

The stock as been a Peter Lynch "10-bagger" since early 2003.

There are a lot of companies in the S&P 500 doing this today, but usually NOT to the same degree.

The first positive sign readers want to look for is revenue growth, and upward revisions to forward revenue estimates.

Disclosure: I am/we are long MCD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.