One of the issues was that the company derives a significant portion of its revenues from renting out its restaurants and a REIT would have also hindered its ability to invest alongside franchisees into remodels and new equipment. It seems the company will push further on the franchising strategy as it plans to increase the amount of restaurants owned by franchisees from ~81% today towards a new long term target of 95%.
Board member Miles White had previously noted that somebody was going to be disappointed in the company’s spinoff decision, but the share price actually went up on the news. That was likely because the company offered a number of other shareholder friendly gimmes such as a bigger dividend and a large share repurchase:
McDonald’s Board of Directors declared a quarterly cash dividend of $0.89 per share of common stock payable on December 15, 2015 to shareholders of record at the close of business on December 1, 2015. This represents a 5% increase over the Company’s previous quarterly dividend and brings the fourth quarter dividend payout to more than $800 million. McDonald’s has raised its dividend each and every year since paying its first dividend in 1976. The new quarterly dividend of $0.89 per share is equivalent to $3.56 annually.
“Our dividend is an important part of our cash return to shareholders philosophy,” noted Chief Financial Officer Kevin Ozan. “In addition to having a balanced and disciplined capital allocation strategy that promotes long-term value for our shareholders, we continuously review the efficiency and optimization of our capital structure as our operating environment and circumstances, such as the current historically low interest rates, continue to evolve. After a thorough evaluation over the last few months, we are optimizing our capital structure by adding a meaningful amount of additional debt. Although this will result in a credit rating downgrade, this still strong investment grade credit rating enables us to efficiently and cost effectively access capital globally, while allowing for continued investment in the business and McDonald’s System.”
Ozan continued, “As a result, we are increasing the Company’s cash return to shareholders target to about $30 billion for the three-year period ending 2016 – a $10 billion increase over our previous target, with incremental debt funding the vast majority of the increase. The $30 billion target will be nearly double the $16.4 billion returned to shareholders for the three-year period ending 2013. This proactive move in our leverage metrics and credit ratings speaks to our willingness to make appropriate adjustments without limiting our ability to co-invest in the business with our franchisees to drive future long-term growth. Together with raising the dividend again this year, these actions reinforce our confidence in the Turnaround Plan.”
No spinoff, but shareholders are getting plenty in return all financed by cheap debt. In response, S&P dropped the company’s credit rating to BBB+ from A-, but the company remains an investment grade credit.
The company recently turned in its first quarter of growth in a long time and Mr. Easterbrook continuously noted that the focus is on executing the turnaround plan. Recent initiatives and experiments such as all day breakfast seem to be doing well and ultimately, shareholders will be happy if the company can resume its upwards trajectory. The company did leave itself some wiggle room for changing its mind about a spinoff in the future by noting that pursuing a REIT didn’t make sense ‘at this time’. Perhaps it will at a different time, but for now the matter is settled.
Disclosure: Author holds no position in any stock mentioned.
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