Does McDonald’s Multibillion-Dollar Stock Buyback Make Sense?

It seems that no one is too attracted towards McDonald’s (NYSE:MCD) stock, but its management definitely is. A few months back, the company declared its intentions to give back its shareholders $18 billion-$20 billion through buybacks and dividends in 2014-2016 which is 10%-20% more than the previous three years. Does this make sense, especially if it has growth troubles? Let’s discuss this.

Not as aggressive as you may think

There are times when companies talk about huge buybacks just to shock the market, but that is probably now what McDonald’s (NYSE:MCD) is doing. Up to now, its buybacks have been steady and not aggressive or hurried bringing back $628 million in shares during 2014’s second quarter and $704 million in its third.

At the rate of $704 million every quarter, McDonald’s (NYSE:MCD) may buyback $2.8 billion stocks a year. This is only 3% a year, with a $92 billion market cap, but it will increase diluted earnings per share by approximately 3%. This means the dividend may increase by 3% without raising cash flow expenditure for its payment. Since 1976, McDonald’s (NYSE:MCD) has increased its yearly dividend, and its yearly share buyback has fallen from $3.95 billion (2007) to $1.81 billion (2013).

Changes on the way

A buyback is only right when McDonald’s (NYSE:MCD) has undervalued stock and the core business continues growing. Peter Bensen, McDonald’s CFO, and his team know the company has been making mistakes recently, but know how to become profitable again. Bensen said in a conference call that they understood the situation well and would take the required measures to tackle its challenges.

Don Thompson, McDonald’s CEO, further communicated that they were happy with the work of their teams across the globe to ensure long-term profits, and though there have been challenges, they have managed them efficiently.

The innovative McDonald’s

From January 2015, McDonald’s (NYSE:MCD) wants to revert back to its basic menu just like during its growth period. This simplified menu would enable a smaller customer waiting period and ease kitchen work, so it can concentrate on introducing items catered to specific local areas

Thompson believed customers want customized items containing local elements, along with a modern-day eating environment and the option to choose what they order, how they order and how they receive the order. That doesn’t mean favorites like chicken McNuggets, Big Mac and Quarterpounder will disappear, it means their will be additional items with a localized taste.

Thompson discussed how McDonald’s (NYSE:MCD) lost its market share to rivals who serve items with a local taste, and has finally realised that. McDonald’s (NYSE:MCD) is known for its Turkish lamb burgers, Japanese sushi and Indian McCurry in the international market, but wants to focus on the US and other areas. Perhaps we may see a Phoenix-style McChimichanga or a NewOrleans-style McCrawdads.

Silly considerations

Overall, McDonald’s (NYSE:MCD) buyback isn’t very big, when its market cap and huge cash flow are deliberated. Perhaps investing in its own stock is a good idea while it’s still down. A good 3.6% current dividend return and rising annual dividends, it seems the market is appraising McDonald’s (NYSE:MCD) for its failed initiatives. It is a good idea to buy stock when it’s down when compared to prospects for growth.