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Chicago Tribune |
James P. Miller
Tribune staff reporter
5:05 PM CDT, September 13, 2007
McDonald's Corp. shares closed up 6.05 percent at a new all-time high Thursday, as equity investors reacted to the company's disclosure of a dramatically higher target for returning cash to shareholders in coming years.
Not surprisingly, the fast-food giant's bondholders see the company's sweetened payout plan somewhat differently.
In New York, the credit-rating firm Moody's Investors Service put McDonald's currently strong "A2" debt ratings under review for possible downgrade, saying the review will "focus on the degree to which McDonald's financial policy will negatively impact its current capital structure and debt protection metrics as [the company] focuses on meeting its target levels of returning value to shareholders."
At the bond-analysis firm Gimme Credit, analyst Carol Levenson used less diplomatic language in discussing the Oak Brook company's new plan. "As we feared," she told bond investors in a note Thursday, "management is bowing to shareholder pressure to abandon its commitment to high credit ratings," and now will likely "increase leverage to return even more cash to shareholders."
After the market closed Wednesday, McDonald's announced that it was raising its once-a-year dividend by a hefty 50 percent, to $1.50 a share, payable in early December to holders of record November 15.
Given the large number of shares the company has outstanding, the higher dividend will send $1.79 billion of company cash back to stockholders.
"Our business momentum, strong stable cash flow, borrowing capacity and anticipated future capital needs reinforce our view that cash available for dividends and share repurchase will continue to grow," Chief Executive Officer Jim Skinner said in announcing the higher dividend.
The company said it now expects to return between $15 billion to $17 billion in cash to shareholders from 2007 through 2009, "subject to business and market conditions." That figure includes not only dividend payouts but share repurchases, which have the effect of boosting the price of a company's shares by reducing the number of shares outstanding.
Deutsche Bank analyst Jason West had been expecting the company to return about $9 billion in cash over the 2007-2009 period. To hit the new, higher target, he said, McDonald's will likely have to issue about $5 billion in new debt over the next two years.
Shouldering that additional debt to hand over cash to shareholders would still leave the company's debt "solidly investment-grade," he said.
Among other things, West said approvingly, the announcement "speaks to management's growing confidence in the stability of the business and cash flow," and reflects the increasing predictability of the company's cash flow as the result of structural changes. West mainted his buy rating on the stock, citing McDonald's "strong business momentum and improving returns."
Citigroup analyst Glenn Petraglia likewise praised the company for its "shareholder-friendly" initiative.
But some critics noted warily that McDonald's has been facing pressure to return more cash to its holders from an activist investor, and suggested that the company may be placating a squeaky wheel rather than pursuing a sound new strategy.
"It's been a great day for shareholder activism, if not for bondholders," said Gimme Credit's Levenson. The news from McDonald's, she said, suggests that "financial flexibility and the balance sheet are being sacrificed in the name of shareholder enhancement."
The bond-rating firm Fitch affirmed McDonald's about $8.2 billion of debt Thursday. Fitch said that while a "material but gradual increase" in McDonald's debt load is likely over time, it expects the restaruant operator to fund the majority of the cash it returns to stockholders through internally generated cash flow and cash on hand.
Continued growth in the company's operating profits will "mitigate any near term decline" in the company's ability to handle its debt obligations, Fitch said, but it added that McDonald's ratings could come under pressure if the company experiences "an unexpected decline in operating performance" while its debt levels are elevated by the expected borrowing.
Moody's acknowledged the "global strength" of the McDonald's brand, as well as the company's powerful market share and cash flow generation. But the rating company said it also wants to review certain "credit concerns," including management's more aggressive financial strategy and competive challenges McDonald's is likely to face in the future.
jpmiller@tribune.com
Copyright © 2007, Chicago Tribune
Associated Press
3:54 PM CDT, September 13, 2007 Thursday, OAK BROOK, Ill.
McDonald's Corp. stock surged 6.1 percent to an all-time high Thursday after the fast-food chain announced the largest dividend increase in its history and pledged to return more money to shareholders than Wall Street expected.
The dollar's record low against the euro also boosted McDonald's, which has more than 6,000 restaurants in Europe.
Shares in the company rose $3.10 to $54.30 in heavy Thursday trading after reaching a new high-water mark of $54.68.
The increase came a day after McDonald's raised its annual dividend by 50 cents per share to $1.50 on Wednesday afternoon and said it expects to return between $15 billion and $17 billion in cash to shareholders through dividends and share buybacks between 2007 and 2009.
Several brokerages upgraded their outlook for McDonald's shares.
"We believe positive global momentum combined with shareholder-friendly initiatives position McDonald's well in a challenging market environment," said Citigroup analyst Glen Petraglia in a research note.
Morgan Stanley analyst Mark Wiltamuth said McDonald's is effectively doubling its goals for annual return of cash to shareholders.
"Given the company's stronger than expected sales trends in U.S., Europe and Asia Pacific and now this larger-than expected buyback and dividend goal, we are increasing our earnings estimates and price target," he said in a note to investors.
Deutsche Bank analyst Jason West said the move speaks to management's growing confidence in the stability of its business and cash flow.
The world's largest restaurant company earlier this week announced stronger-than-expected August sales, citing robust demand in its U.S. outlets for its breakfast items, drinks and new Chipotle chicken wrap as well as a continuing turnaround in Europe.