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Takeaway: Is MCD dividend at risk?

Below is a complimentary research note written recently by our veteran Restaurants Analyst Howard PenneyIf you are an institutional investor interested in accessing Howard's research email sales@hedgeye.com

A Letter to McDonald's CEO Chris Kempczinski | $MCD Best Idea Short - 4 20 2020 8 08 06 AM

Christopher Kempczinski
President and CEO
McDonald's Corporation
110 North Carpenter Street
Chicago, IL 60607

Dear Mr. Kempczinski,

These are extraordinary times, but who am I to tell you. I have been following MCD for 26 years years and have traveled the world on multiple "McTrips," and it has been an honor to be apart of the MCD culture.  What is happening at McDonald's is one of the low points I have ever seen, and it not because of the pandemic!  It's all about how you are treating your family!

After reading Mr. Erlinger’s letter to the NOA, its apparent to me that the McDonald's of today is a relic of days gone past and is neither progressive or inclusive.  Current estimates are for the restaurant industry to lose over $250 billion in revenues.  Given that you are the largest restaurant company in the country, you will be taking a significant hit to the top and bottom line.  The financial implications, as you are finding out, are extraordinary.  How extraordinary we will find out at the end of April.  The world and the global economy are shut-in, and the time is now for you to show the world just how great the McDonald’s I know is. 

As CEO of one of the country's greatest success stories, a global brand that reaches millions every day, you can move this great company in a different direction that will ensure it remains one of the world's most beloved brands in the future.  To not step up and fill a financial void for your franchisee base, will all but cement your place in McDonald's history as the CEO who let the system down in a time of need!

I, like many others, found that letter to be insulting and disingenuous about the culture and the company's response to the current situation.  The Erlinger letter emphasized that "McDonald's has provided unprecedented levels of financial support to U.S. owner-operators." The fact is that McDonald's has not provided any long-term financial support to U.S. owner-operators.  The $900 million in liquidity, he cited is just that short-term liquidity.  The $900 million will become a receivable on your balance sheet and increased debt on the balance sheets of your franchisees.  How long will it take them to pay you back?  The franchisee community is your family, and they are coming to you for help, and you are turning them away in a time of desperate need.  Have they not been there for you during the BBV2020 years, or was your commentary about how they responded just hot air?  Claiming that "no other major franchisor has done more than McDonald's to support its franchisees," is just shallow commentary. 

The letter also stated, "the NFLA Owner/Operator Economic Franchisee Relief Plan fails to recognize that the company has finite resources.  As a result, we must be very targeted and judicious in where we offer financial support and for how long." I'm not privy to what the franchisee relief plan looks like, but I suspect they did not ask for $3.5 billion, which is what you are going to pay out to shareholders in dividends this year!  The $3.5 billion would represent nearly $100,000 per franchise store in emergency relief for the McDonalds family.  Think about the long-term benefit that would accrue to the system with that kind of bold move!  If your shareholders sell the stock, because of that kind of generosity, then you don't want them as shareholders anyway.  When you report earnings on 4/30, if you don't cut or suspend the dividend, because you have the financial flexibility to pay shareholders, you would be giving the McDonald's system the middle finger.  

I understand providing the franchisee assistance and the legal implication around the joint employer rule, but these are extraordinary times.  What if you cut out the service fees for a year? Or reduced the advertising contribution for a year?  There must be several ways you can support the McDonalds family and not violate any laws or endanger the franchisor model.  Lastly, your direct peer group SBUX and CMG, have stepped up, making MCD look bad in the eyes of many people.

I hope you can find a way to support your family in a time of need!

My Best,

Howard Penney