McDonald's: All Loving It After This

McDonald's has set a three-year target of returning $18 billion to $20 billion cash between 2014 and 2016 through dividends and stock repurchases, rewarding investors at a time when the company is under pressure to improve sales performance in its core U.S. market. This plan represents almost 20% increase over the amount of cash returned in 2011 through 2013.

In addition to the capital return plans, the burger company also plans to refranchise at least 1,500 restaurants by the end of 2016, primarily in Europe, the Middle East, Africa and its Asia-Pacific region. More than 80 percent of McDonald's restaurants worldwide are franchised; a model the company apparently wants to expand even more throughout its empire.

McDonald's missed its first-quarter 2014 profit expectations due to flat sales in its U.S stores. The revenue was $28 billion, resulting in 5.2% drop in profits from a year earlier. The company had reported five straight months of decline in the company's biggest market in terms of restaurant numbers. McDonald's reported $2.74 billion in cash and equivalents as of March 31, compared with $1.87 billion a year earlier.

However, the targeted cash returns aren't all coming from existing cash. McDonald's is expected to fund the moves by ongoing operating cash flows, proceeds from planned sales of company-owned restaurants to franchise and license partners, and additional debt. McDonald's said that as part of its new initiative it will scrutinize expenses and refocus its efforts on developing "global digital capabilities."

Oak Brook-based McDonald's (MCD) is struggling to bolster business, seeing its sales stagnate while rivals match its low prices and fast-casual competitors siphon off more and more younger customers.

While CEO Don Thompson has tried attracting customers with free coffee and new burgers and chicken sandwiches, the competition also has been introducing new fare. Burger King Worldwide Inc. has recently started selling new $1 sandwiches, while Taco Bell is now selling breakfast items, such as sausage burritos, nationwide. On the other hand, McDonald's dividend already offers a yield of 3.2%, which is far better than Burger King's (BKW) 1.1% and Wendy's (WEN) 2.4%.

Many companies have increased cash returns to shareholders in recent years, some under pressure from investors. McDonald's had telegraphed the cash move as a financial means of improving its performance.

The bottom line is that McDonald's is a cash-generating machine and plans to prove it going forward. Even greater returns are likely in the future, thanks to efficient cost controls, refranchising activity, and promising growth potential in the emerging markets. I am definitely loving it.

About the author:Riddhi KharkiaA practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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