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McDonald's Stock Clearly Benefits From Its Large Buybacks: Here Is Why

Mar. 09, 2020 10:40 AM ETMcDonald's Corporation (MCD)11 Comments
Mark Hake profile picture
Mark Hake


  • In the last 10 years, McDonald's has cut the total shares outstanding by over 30%. What has happened as a result?
  • Sales have been flat to lower over the period. Net income rose by one-third, but earnings per share are up over 91%. Solely due to buybacks.
  • Likewise, the cost to McDonald's for the dividends it has paid in million has grown 56.4% over the past 10 years. But dividends per share have risen 125% in the same period.
  • One thing we can do is ask what if McDonald's had not bought back any shares? What if all they did is pay out 100% of the amount if bought back in dividends? What would be the return to investors?
  • The results are astounding. After this, you will better understand why companies like MCD pursue buybacks, even though the stock price rises while they are buying shares back.
  • This idea was discussed in more depth with members of my private investing community, Total Yield Value Guide. Get started today »

McDonald's Corp. Is A Good Example Of The Success Of Buybacks

It turns out that McDonald's Corp. (NYSE:NYSE:MCD) is a great example to show why buybacks successfully return capital to shareholders. The reason is that MCD stock has done quite well over the past 10 years while the company has been repurchasing shares.

Keep in mind that sales have basically been flat for this period. You can see this in the chart below:

Source: Mark R. Hake, CFA

In fact, over the period from 2009 to 2019, MCD's sales have actually fallen 7.3% over that period.

Moreover, the company has decided to increase the portion of sales from franchisees rather than corporate-owned stores. In the past few years, more sales have come from franchisee stores than parent stores:

Source: Mark R. Hake, CFA

Part of the reason for this was to increase free cash flow ("FCF") since there would be less capex spent on corporate stores. The net result has been that FCF has grown in the last several years. In addition, FCF margins have increased greatly over the last 10 years. You can see this in the chart below:

Source: Hake

The blue line shows that FCF has increased to 27% in 2019 from just 17% in 2009.

FCF Growth Spurred Buybacks And Share Count Reduction

What did MCD do with that extra FCF? It spent large amounts on buybacks. You can see in the chart below that MCD decided to spend more and more on buybacks than dividends over the past 10 years:

Source: Hake

The idea, from MCD's standpoint, was to reduce the share count through the buybacks. And that is exactly what happened. Over the past 10 years, MCD cut its shares outstanding by almost one-third:

Source: Hake, using Seeking Alpha data

So, clearly, MCD got what it

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This article was written by

Mark Hake profile picture
Mark R. Hake, CFA, has been a consultant to various companies, including hedge funds, software, and technology companies. Prior to that, Mr. Hake was President of Hake Investment Research and Hake Capital Management. He has been featured in Barron’s, CNBC, Bloomberg, and other news organizations as a contrarian investor and deep value specialist.

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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (11)

Tinkie profile picture
Good article, thank you! Buying back stock is equivalent to paying off debt. Dividends that no longer have to be paid increase income, like money spent on interest that is in pocket when debt is extinguishied.
rcm438 profile picture
But they did it with $13bb in debt
BM Cashflow Detective profile picture
Thank you @Mark Hake CFA for your hint and your new article on the subject.
Your article once again confirms my theoretical explanations in my comments of your last article on this topic. But even with your last article you have come to a similar result. No real surprise for me.

But I remember that Warren Buffet said one or more times about stock buybacks that stocks bought back with a premium above fair value can destroy the value of shareholders. Because the management spends two dollars on the value of one dollar a share and destroys one dollar in value. At least in theory. Would you also like to write a corresponding article for this kind of case? A calculation for such a case could also lead to very interesting results.
Biggest SCAM on WS are buybacks. Lot of good those buybacks are looking when finally a super hyped market gets knocked down to reality.

Geez, how many articles do we have to be exposed to, stating "returning value to shareholders"?

It's all a croc. Buybacks are devised so execs and directors can cash in their options at a temporary higher share price. Then those bought back shares get dished right out the back door to the execs again for rinse and repeat.

rcm438 profile picture
What a difference 9 days makes. Traded yesterday at $125. Close to it's historical price of 18x eps. And to get still have $35bb in debt. Ty Mr Easterbrook
Bim Ska La Bim profile picture
Thank you for the nice work... While I'll take a dividend deposit any day of the week, buybacks serve the investor as well... I like how MCD does it...
Thank you for your work
rcm438 profile picture
Did you consider the fact that was it was mostly done with debt? They currently have significant negative equity
kthor profile picture
97% of people don't know that, America has become a debt first nation!
Mark Hake profile picture
I have a heavy suspicion that is why they are converting slowly to a Dary Queen type business model. They have plenty of company owned stores to sell against the debt. BRK owns DQ.
@Mark Hake And you call yourself an analyst? What part of "negative equity" don't you understand?

Equity = Assets - Liabilities. The company stores are part of the assets, and they're still not enough to cover the liabilities.
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