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How Safe Is The McDonald's Dividend?

We conducted a SWOT analysis to answer the question; how safe is the McDonald’s dividend? Looking back at their history and plans for their future, we broke down every strength and flaw that their business could face.

Summary 

Timeline

  • 1954: Ray Kroc is fascinated with the work that the McDonald brothers do, and he sets out to franchise the restaurant

  • 1955: Kroc opens his first McDonalds in Des Plaines, Illinois. First-day sales were $366.12

  • 1963: The famous Ronald McDonald clown becomes the mascot of the corporation.

  • 1968: Big Mac is added to the national menu

  • 1990: McDonald’s opens up in Moscow 

  • 2003: “I’m lovin’ it” campaign launches 

  • 2015: All day breakfast is introduced nationwide in the United States.

Business Model 

In the early stages of McDonald’s, Ray Kroc saw how vital customer service and delivery times were for a customer. The McDonald brothers came up with the exquisite idea to create a uniform menu that could be served quickly to the customer. This allowed them to design a business model that could supply its customers with the same quality of food in short timespan. Ray Kroc’s vision for McDonald’s was quality across the board. If you bought a burger in Florida or Alaska, it should still taste the same. Seeing the potential for a standardized business model, Ray Kroc went ahead and focused on franchising McDonald’s.

Although the McDonald's brand recognition is widely recognized throughout the globe, they are known for their franchise model more than their food. McDonald’s is heavily focused on franchising its establishment, 93% of its locations were franchised. This business model is advantageous as it provides a constant stream of revenue from rent and royalty. In addition to aiming for stability, McDonald’s has leverage for future negotiations with each franchisee depending on market conditions. The McDonald’s corporation keeps around 82% of the revenue generated from each restaurant that is franchised. This is an impressive number as the company-operated locations only account for 16% of revenues kept. 

The McDonald’s franchise is widely sought after. As a result, the requirements to become a franchise owner for McDonald's are incredibly stringent. The reason why it is so in demand is due to the significant margins that each restaurant produces. Due to the uniform menu and standard quality controls throughout the company, profit margins on every product are well above market standards. The liability for McDonald's also decreases by using franchise establishments.

A majority of the establishments are owned by franchise owners that are from the communities they serve. As a result, these franchise owners can cater their menu and marketing tactics to populations that they are well aware of and their interests. This is why McDonald's has multiple menus depending on countries, as something trendy in Nebraska might be a flop in Berlin, Germany. 

Three business segments make up the revenues and brand of the McDonald's corporation: U.S. market, International Operated Markets (serves the top five international markets), and International Development Licensed Markets. The U.S. market makes up 37.2% of revenue, International Operated Markets (IOM) is 54%, and the International Developmental Licensed Markets account for 8.7% of revenue. 

Strengths

Valuable Brand

McDonald’s has a very strong brand image within U.S. households. According to Statista, McDonald’s is among the most valuable brands in the United States. They are a leader in the fast-food industry and have an enormous global presence. The fast-food industry is a fierce sector; many of the top brands compete with each other to offer the best quality of food at the lowest possible price. In 2020, McDonald’s had a brand value of $129,321 billion dollars, the closest competitor, Starbucks, had a brand value of only $47,753 billion dollars. McDonald’s  worldwide presence allows it to dominate the fast-food industry as its quality and prices tend to beat all other competitors. 

Tasty Food

Burger and fries are perhaps one of the most iconic food combinations in the world. Fries are an essential staple for many consumers worldwide. A YouGov poll surveyed consumers across the United States to see which fast-food brand has the best fries and burgers. McDonald’s fries ranked at the number one spot, 34% of the people surveyed ranked McDonald’s as having the best fast food fries.

Although they ranked the best for their fries, their burgers did not exceed those of their competitors. Five Guys and Burger King were both voted to have a better burger than McDonald’s. Keep in mind that McDonald’s has very specific menu items. One item that may be served in India, may not be available in Europe. Not ranking for the best burger is not a downfall of McDonald’s. The burger market is highly concentrated around the United States region, and those who were surveyed were from the United States.

Which Fast Food Chain Has The Best Burger & Fries?
Which Fast Food Chain Has The Best Burger & Fries?

Technology Initiatives 

McDonald’s in 2019 launched their campaign “Experience the Future”. The goal of this campaign was to revolutionize the way people interact with the McDonald’s ecosystem by dedicating to remodel and implement technology throughout all the U.S. based locations. The first step in this process was to redesign the establishments itself. McDonald’s analyzed every single interaction from when a customer would walk in, to when they would leave. McDonald’s studied this data by analyzing specific behaviors such as walking patterns, dining room layout and staff service in order to create the most enjoyable experience that they could offer to a patron.

In addition to modernizing their establishments, they implemented the self-service kiosk and partnered up with Uber Eats. It is estimated that over 1 billion people live within 10 minutes of a McDonald’s, as a result this partnership aimed to increase their convenience and speed of their service to all customers. Self-service kiosk had a goal to recoup an estimated $2.7 million in lost revenue due to waiting times. Partnering up with Uber Eats and DoorDash, McDonald’s was able to reach more users than ever before. Since 2017, delivery has grown to be about a $3 billion business for McDonald’s but it is still considered a very low sector of their business as it only makes up around 2-3% of their total revenues

Weakness

All Day Breakfast Menu 

In 2015, McDonald’s introduced the all-day breakfast menu. This was a very popular menu, but as time went on it saw a decline in interest. Once, COVID-19 hit the U.S. economy the all-day breakfast menu took a huge toll. As more companies decided to go remote, the demand for breakfast drastically reduced. As the severity of the virus increased, McDonald’s reduced their menu in order to streamline operations. One of the first cuts that they made was the breakfast menu. McDonald’s encouraged franchisees to focus only on their core items such as burgers and fries. The main concern regarding this decision were the waiting times for their dinner customers. With restaurants being forced to shut down dining rooms, drive through became the new standard. Increasing queue times and declining sales, forced McDonald’s to abandon a once very popular menu. Although they plan to bring it back, it is uncertain when it will come back.     

Millennial’s View on Fast-Food

Millennials have revolutionized the way fast-food chains advertise.. In recent years, fast food has gotten a lot of backlash due the way they obtain their products and their quality control. Millennials have a very strong preference for convenience and are on track to have more spending power than the baby boomers. Their taste preferences are closely monitored as they will influence the next generation. Currently, iconic fast-food chains do not have a very positive image in the millennial community. Rather than opting for burger and fries, millennials are looking to healthier options such as Chipotle and pizza chains such as Blaze. It is estimated that only one in five millennials have tasted a big mac in their life.  In order to keep up with consumer behavior, McDonald’s will need to update their menu to include healthier options that could rival many of the fan-favorite chains like Chipotle. 

Opportunities

Value Meals 

In 2018, McDonald’s introduced its value meal for value-conscious customers. In addition to adding the dollar menu, they introduced the mix and match menu where customers can choose from the options and combine them for a lower price. The main scope of adding the value meals to their menu was to upsell customers. With a low price of $1, $2 or $3, customers would be more willing to add an item to their order.

Former CEO Steve Easterbrook noted that based on data, they saw a significant increase in value meals that were added to a customer’s order. The main concern of the franchisee was the cost of the value menu. With inflation, franchisees would make little to no money on these items and would lower their profit margins.

Healthier Menu 

As consumer behavior is changing from fat-based foods to healthier options, McDonald’s fails to appeal to the younger generations. Millennials specifically have adopted a brand-new food system, in which they focus on their health and dietary intake more than ever before. Forbes estimated that 52% of organic consumers are millennials and eat 52% more vegetables than the older generation. Diets such as keto, vegan or any other alternatives rose up in popularity more than ever before.

In order for McDonald’s to stay relevant with consumer behavior, they need to add healthier options to their food menu. In an attempt to capture this movement, McDonald’s introduced oatmeals, salads and artisan chicken options within their menu, but due to COVID-19 some of these menu items have been temporarily removed. Appealing to the upcoming generations, McDonald’s will need to incorporate less fat and more protein within their menu. Fast-food chains are now competing amongst each other to have the healthiest food possible at the lowest cost possible. In order to capture more of the market share within this sector, a revamp of a healthier menu that appeals to more consumers is needed. 

Threats

Former Franchisees Lawsuit

McDonald’s recently came under scrutiny for racial discrimination in their franchise business. This would make it the third lawsuit for discrimination that McDonald’s has to face this year. The lawsuit filed by 52 African American franchise owners claims that McDonald’s pushed them to open restaurants in neighborhoods that had higher security and insurance premiums compared to their white counterparts. On average these franchises averaged $700,000 less in annual revenue than locations that were in white neighborhoods. In addition to this lawsuit, former high-ranking executive members have filed lawsuits against McDonald’s claiming racial discrimination in the workplace. A turbulent history with African American employees and franchisees not only gives bad P.R. to the company, but it can discourage future investments. 

Low Product Diversification

One of the goals of Ray Kroc was to standardize the food menu. As a result, most of the McDonald’s locations globally serve relatively similar menus. The fast-food menu is centered around burgers and fries, which recently has lost its appeal to the younger generation. The brand image is currently associated with high fat food items, which is not as appealing as it used to be. High caloric menu items are now frowned upon by many consumers. A standardized menu that offers higher profit margins and lower waiting times, may negatively impact them in the future. Diversification of the menu was attempted by McDonald’s in the past, but the sales number of the new additions rarely beat those of their classic menu.

Acquisition or Organic Growth

McDonald’s is a very conservative company. Their history does not include manymergers or acquisitions.Historically, McDonald’s acquired only four major companies: Boston Market (sold), Dynamic Yield, Donatos Pizza and Apprente. In 2019, McDonald’s stepped up their acquisition with Dynamic Yield and Apprente, both indicating that McDonald’s is adopting a technology driven growth path. Apprente specialized in conversational technology for complex, multilingual and multi-accent ordering. This technology aimed to ease and increase the satisfaction of customers when ordering through the drive through. Eventually, McDonald’s is planning to incorporate this technology in their drive thru windows, mobile ordering platforms, and kiosks. 

The next big technological incorporation that McDonald’s aimed for was decision technology. The same year that they acquired Apprente, they acquired Dynamic Yield. Dynamic Yield specialized in personalization and decision logic technology. In their Velocity Growth Plan, McDonald’s emphasized the importance of technology to retain and capture new customers. One of the major steps that McDonald’s implemented was digital drive thru menu options. Instead of utilizing a paper outline of their menu, customers could now see real time the menu based on the time and what was available at their specific restaurant. The Dynamic Yield technology focused on recommending items to customers based on their current selection and suggest new items that would complement their order. Commitment to the customer and the potential to upsell customers allows McDonald’s to focus on retaining customers and regaining any lost customers in the past by creating a dining experience catered to each individual. 

Revenue Growth

McDonald's Revenue
McDonald's Revenue

McDonald’s since 2015 has seen a decline in revenue growth. Although the 2020 revenue is not yet released (as of 9/3/2020) the future does not seem bright. Dining room closure will drastically cut revenue. With drive thru and outdoor sitting being the only spaces allowed to order and eat in the majority of the United States, McDonald’s will lose a significant amount of revenue due to COVID-19. Although millennials  and limited menu items are a factor in the declining revenue, McDonald’s efforts to integrate technology in their business model can upswing the downward trend that it is currently experiencing. 

Long-Term Debt

MCD Debt
MCD Debt

McDonald’s debt skyrocketed in 2019 from previous levels, although it was on track to have a higher long-term debt in 2019 than in 2018. One of the major reasons was the technological approach that McDonald’s implemented in 2019. It acquired two major companies that aimed to improve its ordering system and customer satisfaction. Apprente was obtained by McDonald’s at a cost of $300 million.

Debt-to-equity

MCD Debt to Equity
MCD Debt to Equity

McDonald’s has been unfortunately floating in the negative debt-to-equity ratio since 2016. A negative debt to equity ratio means that the company has more liabilities than assets. Focused on creating a more sustainable supply-chain ecosystem combined with innovative technology has improved their debt to equity ratio significantly from 2016 to 2019. Although, it is poised to grow in 2020, McDonald’s is still a household name that has a very loyal customer base at its core. 

Cash Flow Metric

MCD Cash Flow
MCD Cash Flow

McDonald’s free cash flow has been on the upswing recently, which is great news for dividend investors as it shows that the company is able to distribute dividends even in hard times. Slight up and downswings are expected as McDonald’s has solidified their place in the fast-food industry and are not competing for new customers as much as an emerging business might be. With technological implementations in their customer centric plans, we should see more available free cash flow in the next 5 to 10 years. If they are able to appeal to the younger generations, McDonald’s is poised to have constant returns in the future. 

Dividend Growth

MCD Dividend Growth
MCD Dividend Growth

As a dividend aristocrat, McDonald’s has proven time and time again that its shareholders are very important to the company. Year after year they have increased their dividend. Currently, McDonald’s boast a dividend yield of 2.35% and has a trailing payout ratio of 63.78%. Based on the current climate with the sudden interruption of the virus, McDonald’s may see some decline in revenue, but their outstanding dividend history, it is extremely unlikely that they will cut their dividends or suspend them. 

Final Thoughts 

McDonald’s is a household name, the golden arches and its simplistic menu allowed it to expand globally in a short period of time. With over 1 billion people living within 10 minutes of a McDonald’s, their global presence is one of a kind. Changes in consumer behavior, such as millennials aim to create a healthier lifestyle for themselves, put McDonald’s in an unpredictable position. Nonetheless, McDonald’s is still loved by many. Their value meals and mix and match dining options allow value conscious consumers the opportunity to indulge in their products. With recent plans to expand their operations by implementing technology focused goals, McDonald’s is revolutionizing the way customers order and interact with their ecosystem. Dividends seem to be safe for the future, it is rare that a dividend aristocrat cuts or suspends their dividends. Breaching this trust is not an objective of McDonald’s goals. In present times, every major corporation has seen its hardships with the battle of COVID-19 but looking at their history and future goals, McDonald’s will uphold its promise to their investors by continuing their dividend streak.

Written by: Armand Bogdan
Published on: Friday, September 11, 2020 4:00 PM

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