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McDonald's: Dividend Growth Potential Vs. Debt Pile

Beulah Meriam K profile picture
Beulah Meriam K


  • McDonald's has doubled its debt in the last five years, and in 2016 the company paid $885 million in interest.
  • Revenues, operating income and cash flow are declining because of the mandate to be franchise-heavy.
  • Will debt levels start impacting the company's dividend capabilities?

McDonald’s (NYSE:MCD) management’s decision to change its business model towards a highly franchised restaurant operator has made the company an attractive investment choice for dividend investors. But the company’s rising debt profile remains a huge concern for any investor who wants to stay in it for the long haul. Are dividends under threat? Does the current debt level make dividend growth unsustainable? What should investors do at this point?

As the company embarked on its journey towards running a 95% franchised restaurant model, it has been aggressively changing its capital structure as well. The reasoning behind taking the highly franchised route is to reduce risk that comes along with company-operated restaurants, curb capital investments in return for stable revenues, and enjoy high operating margins and steady cash flow. With the requirement to re-invest in the business becoming lower in this model, the freed-up cash can be returned to shareholders in the form of share repurchases and dividends.

But McDonald’s had gone one step further and used the current low interest rate environment to eat up debt for breakfast, lunch and dinner. In the last five years, McDonald’s total debt shot up from $12.5 billion in 2011 to $25.956 billion in 2016, while total revenue, operating income and operating cash flow kept declining, thanks to the company reducing the number of company-owned restaurants from 6,435 to 5,669 units during that period.

As the number of company-operated restaurants came down, capital expenditure declined from $2.730 billion to $1.821 billion. So where did all that debt go, then? McDonald’s added $13.456 billion in debt to its balance sheet during the 2011-2016 period, while spending $17.324 billion in share buybacks in the last two years alone. It’s clear that McDonald’s used most of its debt as well as cash flow over the last few years to keep buying back shares.

This article was written by

Beulah Meriam K profile picture
I do deep-dive analyses into the top companies in multiple segments, including retail, consumer goods and technology.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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