McDonald's marginal miss

It is a company that serves 69 million customers daily in over 34 thousand restaurants in 118 countries (obviously around the world). The company provides jobs for 1.8 million people globally, third only in a commercial sense to WalMart and China Railway Engineering corp. The Chinese Army and the US Defense dept employ more people than those commercial ventures. It is a company that opens 28 new restaurants a week around the world. You guessed it, McDonald's, who reported numbers on Monday that I guess failed to impress Mr. Market. Year to date sales are only two percent higher, net income is up 3 percent, whilst EPS is up 5 percent. Earnings per share for the quarter were 6 percent better (7 excluding the currency translation) at 1.52 Dollars. One cent negative currency translation for the quarter, three cents so far this year!


Europe and America were OK, from a sales perspective, if not at all inspiring, with the major disappointment being China, Japan and Australia. Why? Well, the release suggests an ongoing challenging environment. The only main new menu innovation was the mighty wings launch in Atlanta, you guessed it, chicken wings! The lack of acceleration in sales has promoted a few broker price target downgrades, and all around negative sentiment.


A little history and background to cheer you up a little. Everyone knows who Ray Kroc was, but perhaps Fred Turner, or plain old "Fred" who died at the beginning of the year, is considered by many internally as the person who set the standards for quality. Fred was a stickler for size and quantities and many of the systems he put in place (the 30 something employee at McDonald's) around sizes and consistency still remain today. Ray Kroc's wife (Joan, 26 years his junior), when she died in 2003 left 1.6 billion Dollars to the Salvation Army. Wow.


I found something amazing. Number of shares in issue in 1996 or McDonalds was 1,389 million. Ten years later it was 1,204 million (as per the 2006 annual report, page 20). In that time, earnings per share increased from 1.08 Dollars to 2.30, whilst the dividend rose a whopping 85 cents a year, to 1 buck from 15 cents in 1996. Systemwide stores grew from below 21 thousand in 1996 to 31.6 thousand in 2006. Fast forward to the 2012 annual report, page 9 (things were super sized back then) and the number of shares in issue is just a whicker over a billion, 1,003 million in issue.

In 16 years, the number of shares in issue have been reduced by a whopping 386 million. Earnings per share last year clocked 5.36 Dollars and the dividend rose to 2.87 Dollars. Over the last three years however, 107.8 million shares, roughly 36 million a year. There are now under 1 billion shares in issue. At this rate in a few (that is three) years time the number of shares in issue over a two decade period would have reduced by nearly one third. That is amazing, truly amazing. Another amazing fact about McDonald's is that the dividend has risen each and every year since they starting paying one back in 1976. The current quarterly payout is 81 cents (raised 5 percent in September) to bring the annual payout to 3.24 percent. At the current share price (95.28) that is a yield of 3.4 percent on the button. With a rough 5 percent increase in earnings, McDonald's is hardly cheap at 16.9 times forward, especially if they are only growing earnings at single digits.


I feel inclined suggest that one leaves the investment alone, there is a fabulous yield underpin and the brand is amazing. The store presence is still growing at an astonishing rate, 1 store rolled out roughly every six hours, somewhere around the world. The plan is to be in each and every neighbourhood. For the time being the sales momentum seems more like soggy fries than the delicious (must eat hot) fries that they normally sell. There is no way that this company is transformative in any way whatsoever, you could argue that the menu changes slowly to adapt to the ever aware society, in terms of health priorities. They are doing that, offering apples instead of fries with their happy meals, watch this short Bloomberg video: McTaco? McOmelette? Meet McDonald's Top Chef Dan Coudreaut. Interesting, isn't it?


Accumulate on weakness, that is the perfect time to be adding to a solid company, when most people are not really paying that much attention, and have lost the faith.