Of all the firsts CEO Don Thompson has been facing in his new role, the September dividend announcement will be one of the more important messages he sends to the Street.
The dividend announcement is expected to come following the mid-September board meeting.
Keep the following in mind as we near the announcement:
- MCD generally tries to keep dividend growth in line with earnings growth
- EPS growth was 10%, 14% and 15% in 2009, 2010 and 2011, respectively
- Dividend growth was 15% over the last year and 12% over the last three years
- EPS growth in 2012 will likely be in the 2-3% range
- The Street is expecting 10% EPS growth in 2013
- The average of 2012 and 2013 earnings growth is likely to be roughly 6%
With all of this in mind, we would expect McDonald’s dividend growth to be in the 6-9% range with a potential upside surprise to 11%. The strength of McDonald’s cash flows is important to investors and the coming dividend announcement will likely be interpreted as a signal of the board’s confidence in that metric over the next 12 months.
Share repurchases are also a factor for investors and, while the overall pace of buy backs has slowed relative to the 2007/2008 time frame, we expect it to slow in 2013 also. If McDonald’s were to send a strong signal and raise the dividend by 10%, that would imply roughly $3 billion in dividends for 2013. On average, over the past four years, the company has returned $5.4 billion to shareholders in dividends and share repurchases. If we assume a similar level of dividends and repurchases in 2013, along with a dividend increase of ~10%, share repurchases would amount to approximately $2.4 billion, which would be the smallest dollar-amount since 2005.
We expect a sequential sales improvement for McDonald’s over the next month or two. The dividend announcement could also provide a boost to sentiment. Following that announcement, we will remain on the sidelines awaiting indication that a recovery is under way.