Published Mon, 17 Jul 2017 10:02:04 -0400 on Seeking Alpha
McDonald’s (MCD) management’s decision to change its business model towards a highly franchised restaurant operator has made the company an attractive investment choice for dividend investors. But the company’s rising debt profile remains a huge concern for any investor who wants to stay in it for the long haul. Are dividends under threat? Does the current debt level make dividend growth unsustainable? What should investors do at this point?
As the company embarked on its journey towards running a 95% franchised restaurant model, it has been aggressively changing its capital structure as well. The reasoning behind taking the highly franchised route is to reduce risk that comes along with company-operated restaurants, curb capital investments in return for stable revenues, and enjoy high operating margins and steady cash flow. With the requirement to re-invest in the business becoming lower in this model, the freed-up cash can be returned to shareholders in the form of share repurchases and dividends.
But McDonald’s had gone one step further and used the current low interest rate environment to eat up debt for breakfast, lunch and dinner. In the last five years, McDonald’s total debt shot up from $12.5 billion in 2011 to $25.956 billion in 2016, while total revenue, operating income and operating cash flow kept declining, thanks to the company reducing the number of company-owned restaurants from 6,435 to 5,669 units during that period.... Read more