McDonald's Plan to Win Strategy on Track - Analyst Blog

McDonald's Corp. MCD recently provided an update on its “Plan to Win” strategy at the Sanford C. Bernstein Thirtieth Conference, which includes a cash return target over a 3-year period. The company's Plan to Win strategy involves tasks like optimizing the menu, enhancing the customer experience and broadening accessibility to the brand.

With this recent update, the company further intensified its commitments under its customer-focused strategic framework. Following the announcement, Moody's Corporation MCO affirmed McDonald's A2 unsecured and P-1 commercial paper ratings.

Per its cash return target, the company intends to return wealth to its shareholders in the range of $18.0 billion to $20.0 billion over a 3-year period from 2014 to 2016 via dividends and share repurchases. This represents an increase of 10.0% to 20.0% over the amount of cash returned from 2011 to 2013.

McDonald's has been regularly rewarding its shareholders through share repurchases and dividends. The company has a history of increasing dividend every year since the inception of its dividend payout policy in 1976 with the latest being a 5% increase in Sep 2013. Moreover, during the past five years ended 2013, it has returned about $26.0 billion to shareholders through share repurchases and dividend payments.

Meanwhile, the company has also decided to re-franchise approximately 1,500 restaurants mainly in the Asia/Pacific, Middle East and Africa and Europe over the same period. This represents more than 50.0% increase over the previous 3-year period. Currently, around 81.0% of its restaurants are franchised.

We believe re-franchising a large chunk of its system reduces the company's capital requirements and facilitates earnings per share growth and ROE expansion. Alongside, free cash flow continues to grow, allowing reinvestment for increasing brand recognition and shareholder return.

The company intends to work on its general and administrative spending so that the resources can be reallocated to high growth areas, which also includes the development of its global digital capabilities. The digital wave has hit the U.S. fast casual restaurant sector as more and more restaurants are deploying technology to enable a better guest experience. So the company's focus in this area would drive traffic. A few other restaurants chains that are aggressively moving on this track are Panera Bread Company PNRA and Buffalo Wild Wings Inc. BWLD, both of which use tablets and kiosks to drive traffic.

Despite frequent menu innovations and focus on customer value, McDonald's has been struggling to increase sales amid a weak consumer spending environment and stiff competition from other leading hamburger chains. We believe that this Zacks Rank #3 (Hold) company is trying to mitigate these effects with its strategies.