A few things. McDonald's made about $5.5 billion per year in 2011,12, and 13, before earnings dropped to $4.8 billion in 2014, so using that one year to extrapolate their return on capital spending is assuming that 2014 is now the new normal rather than a down year (or two). That may end up being correct, but I wouldn't consider it a lock.
At any rate, I would think a poor return on new invested capital would be a reason to encourage dividends and buybacks, not discourage them. They are a mature business. There is little growth opportunity in their existing business and I would prefer that they not branch out into businesses beyond their competency. I'm happy to have the profits returned to me sensibly.
If you feel that MCD is overpriced at a PE 19.4 (I agree it is probably high), do you really think CMG is not at a PE of 55? For all the talk of CMG eating McDonald's lunch, they still have less in revenue than McDonald's has in earnings. There are dozens of companies that have been in CMG's position in the past, and McDonald's is still here. It's easy to grow a restaurant business fast from a small base, but many stumble pretty hard when they get to CMG's size.
I've owned MCD since 2002. At that time, they had issues that make this year's look like nothing real big. They had net income of 900 million or so down from 1.6 billion. Their menu was a mess (anyone else remember the salad shakers?), and they were in a foolish dollar menu war with Burger King. I bought the my shares at 21.5 in September of 2002 with the hope that they would right the ship. They did with a vengeance.
A down year of 4.8 billion doesn't look so bad when twelve years ago the down year was 900 million.
I suspect they will get their house back in order within a year or two.
At any rate, I would think a poor return on new invested capital would be a reason to encourage dividends and buybacks, not discourage them. They are a mature business. There is little growth opportunity in their existing business and I would prefer that they not branch out into businesses beyond their competency. I'm happy to have the profits returned to me sensibly.
If you feel that MCD is overpriced at a PE 19.4 (I agree it is probably high), do you really think CMG is not at a PE of 55? For all the talk of CMG eating McDonald's lunch, they still have less in revenue than McDonald's has in earnings. There are dozens of companies that have been in CMG's position in the past, and McDonald's is still here. It's easy to grow a restaurant business fast from a small base, but many stumble pretty hard when they get to CMG's size.
I've owned MCD since 2002. At that time, they had issues that make this year's look like nothing real big. They had net income of 900 million or so down from 1.6 billion. Their menu was a mess (anyone else remember the salad shakers?), and they were in a foolish dollar menu war with Burger King. I bought the my shares at 21.5 in September of 2002 with the hope that they would right the ship. They did with a vengeance.
A down year of 4.8 billion doesn't look so bad when twelve years ago the down year was 900 million.
I suspect they will get their house back in order within a year or two.
I think perhaps I have not adequately done a good job describing the problem and the bubble I see building in corporate debt, and this applies equally to the oil stocks and to MCD.
Mc Donald's in 2008 made 4.2 Billion dollars, in 2014 4.8 Billion dollars. For the past 7 years net income has grown at 2.2 percent annually on average, this is based on actual dollars. On a per share basis thanks to share buy backs net income has grown 6 percent annually. The difference investors and McDonalds thanks to the continual pressure of share buybacks results in a higher PE than the company would deserve otherwise, currently at 19.4 which at 2 percent growth really belongs at a PE of no more than 14 in my view which would value the stock at 70 not 95. As McDonald's continues to participate in this poor use of corporate funds it is wasting the resources it has.
Over the last 7 years McDonalds has earned 34.8 billion dollars and paid 18.1 billion in dividends and 14.7 billion in share buybacks. Leaving McDonalds to fund it's net investment in the actual business with 2 billion dollars over those 7 years, to supplement that it has borrowed 7.1 billion in long term debt in this time and has had net cash investment (Capital Spending less depreciation) of 8 billion with another 1.5 billion or so used for other cash purposes such as inventory, receivables and changes in accruals. Total capital spending in this time frame was 18 billion dollars.
How effective is that investment of 8 billion dollars of cash - for that investment over the past 7 years of 8 billion income increased 500 million annually by the end of 2014. On total capital spending of 18 billion this is a return of 3 percent, McDonald's would do better buying Apple's long term debt with their short term 5 year debt. On the other hand the 320 million invested in Chipotle by Mcdonalds is now worth 22 billion or more than all the dividends paid by McDonalds in the last 7 years and built with capital McDonalds invested to create a national company that now openly mocks and is taking business from the very company that made it possible.
That a company cannot own soda shops, ice cream shops, railroads and banks I think is not true, with the proper management a company can invest in anything but a review of what they do with their investments should be the judgement of investors, not how much of the income they return to investors. And I firmly believe it is management's responsibility to return income to their investors but for a normal corporation I expect 33-40 percent. Over the last 7 years McDonalds has returned 94.5 percent of income to investors through dividends and share buybacks, I just think it is not a prudent use of valuable resources to be such as high percentage. The red flags on this stock are just so high to me and this is a similar problem the oil companies have.
Over the course of time described here as McDonald's has been on their share buy back spree the price has gone roughly from 50-55 dollars to 90-100 dollars, so looking at the share price one would think this has been a good thing for investors, but what this has been is a company overpaying for it's shares which are not worth more than 70 dollars in my estimation. I wonder how much better McDonald's would be if it had used the 14.7 billion in share buybacks to buy stock in Berkshire Hathaway instead and at least give their money to someone who understands investments better than Ronald!