Today McDonald's Corp (NYSE:MCD) announced a raise in their quarterly dividend from $0.77/share to $0.81/share. This is an increase of 5.2%. I always find it exciting when a company I own raises its dividend. Probably because that means I just got a raise. Whoop whoop! However, the amount a company raises its dividend can be telling.
From what I've been reading on many blogs of people who label themselves dividend growth investors (DGIs), the dividend is an all holy thing and a company may be dropped from a portfolio if it fails to live up to dividend growth expectations. This rubs me the wrong way. More important than the failure to meet expectations is understanding why the company chose to take that course of action over the others. Sit back for a minutes, pull up some financial data, and think through management's options. If you would have made the same choice, then you essentially agree that your money is in good hands and that management is working on making things better in the future.
A few months ago I realized McDonald's would come due for a dividend raise in September, and I started playing around with some numbers to try and gauge what it might be. The analyst estimates have changed a little since then, but let me see if I can recreate what I did:
Per yahoo finance, the average EPS estimate for FY2013 is $5.61. This is an estimated increase of 4.7% over FY2012′s EPS of $5.36. the average EPS estimate for FY2014 is $6.11. This is an estimated increase of 8.9% over estimated FY2013 EPS. (you see the whole thing gets blurrier the further out we go). The estimated 5-year compounded EPS growth is 8.4%. (note: I don't put a lot of weight on analyst estimates, they seem to fluctuate as much as the market does-however, the are a useful tool in certain situations, like this)
Back when I ran these numbers, there were a lot of articles out about McDonald's perceived struggle to grow the top line. The company is working very intently to meet customers' needs through new product offerings and by making itself more relevant. The company needs to reinvest capital into the business right now. I decided I did not want to see a dividend increase of more than 6% this year. An increase much higher than 6% would signal to me that shareholder payouts are valued more than the long-term health of the company. In essence, I would have actually viewed as raise of 10% or more in this situation to be a negative, and definitely raise a warning flag.
I believe McDonald's is an awesome company in the QSR industry, and I have believe management will find a way out of the current stagnation. However, while I own a bunch of companies that I have pigeon-holed into the DG category, I firmly believe that a company should invest in its future first, and that dividends should correlate to business returns, not be independent of them.
Disclosure: I am long MCD.