Fast-food giant McDonald's (NYSE: MCD) just gave investors another reason to like its dividend. As expected, the company announced an increase to its dividend last week. Even better, McDonald's increased its dividend by a higher percentage than it did last year, highlighting recent strength in its business.
Here's a close look at the dividend increase -- and what it means for investors.
A 7% increase
On Thursday, McDonald's said its board approved a 7% increase to its quarterly dividend, increasing it from $0.94 to $1.01. This brings the company's commitment to $4.04 worth of dividends annually. The first quarterly dividend at this new rate will be paid on Dec. 15.
"We continue to make progress in building a better McDonald's with our Velocity Growth Plan," McDonald's CEO Steve Easterbrook said about the dividend increase. "Today's dividend increase reflects our confidence in the strength of the business and our ability to deliver sustained, long-term profitable growth for our system and our shareholders."
The increase was the company's 41st consecutive annual one, extending a long history of shareholder-friendly dividend increases.
Last year, McDonald's increased its dividend by 6%. This year's 7% increase, therefore, importantly marks an acceleration in dividend growth.
A higher increase for the dividend this year made a strong dividend even stronger. McDonald's currently has a solid dividend yield of 2.4%, easily exceeding the 1.9% yield at Wendy's (NASDAQ: WEN). Furthermore, the dividend yield at McDonald's is above the average 2% dividend yield of stocks in the S&P 500.
McDonald's also has more wiggle room for its dividend if earnings take a dive than Wendy's does. McDonald's paid out 77% of its trailing-12-month free cash flow in dividends, while Wendy's paid out 80% of its free cash flow in dividends. Similarly, McDonald's has a lower payout ratio than Wendy's. McDonald's paid out about 61% of its trailing-12-month earnings in dividends, while Wendy's paid out about 70% of its earnings.
An acceleration in dividend growth adds to the growing evidence of a revitalized McDonald's business.
The fast-food company's recent efforts to strengthen its business are particularly evident in its comparable sales and guest count growth. Global comparable sales and guest count growth in the second quarter were higher than in any other quarter in the past five years. Global comparable sales in the second quarter were up 6.6%, helped by larger transaction amounts and growth in guest counts across all segments. Further, the comparable sales were up from the 4% year-over-year growth in the key metric McDonald's saw in its first quarter.
These trends bode well for the ongoing deployment of the company's Velocity Growth Plan initiative, which includes a focus on enhancing digital capabilities, the rollout of delivery, and more. Together, McDonald's hopes the plan will help the company "attract more customers, more often," Easterbrook explained when the plan was unveiled in March.
Shareholders should not only be pleased with the fast-food company's 7% dividend increase, but they should also expect more meaningful increases in the years to come.
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