McDonald’s Corporation (NYSE:MCD) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 30th of August to receive the dividend, which will be paid on the 17th of September.
McDonald’s’s next dividend payment will be US$1.16 per share, on the back of last year when the company paid a total of US$4.64 to shareholders. Based on the last year’s worth of payments, McDonald’s stock has a trailing yield of around 2.2% on the current share price of $214.66. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it’s growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. McDonald’s is paying out an acceptable 58% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether McDonald’s generated enough free cash flow to afford its dividend. It paid out more than half (66%) of its free cash flow in the past year, which is within an average range for most companies.
It’s positive to see that McDonald’s’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it’s a relief to see McDonald’s earnings per share are up 6.6% per annum over the last five years. Decent historical earnings per share growth suggests McDonald’s has been effectively growing value for shareholders. However, it’s now paying out more than half its earnings as dividends. Therefore it’s unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. McDonald’s has delivered 8.8% dividend growth per year on average over the past 10 years. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
From a dividend perspective, should investors buy or avoid McDonald’s? Earnings per share have been growing modestly and McDonald’s paid out a bit over half of its earnings and free cash flow last year. All things considered, we are not particularly enthused about McDonald’s from a dividend perspective.
Wondering what the future holds for McDonald’s? See what the 28 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.