The news probably irritated a number of activist investors, but McDonald’s (MCD) has decided not to spin off its substantial property holdings into a standalone REIT. Activists have been pushing for some time to get the fast food chain to break apart into a real estate trust and a restaurant operator. That’s probably ultimately better news for long-term shareholders.
Despite its well-documented menu problems, McDonald’s stock has really had a nice run, especially of late. It’s up from $95 and change to nearly $114 per share currently, as speculation mounted on the spinoff. Of course, it didn’t hurt that the company recorded a US sales increase for the first time since 2013.
Although he nixed the REIT spinoff, CEO Steve Easterbrook provided three bits of news that shareholders might cheer. First, the Golden Arches is looking to franchise even more of its locations. It currently franchises about 80% of its stores, and is looking to move that figure longer-term up to 95%. That will provide it with lower revenue that is much higher margin and less subject to the operational performance of its restaurants. Any way you slice it, Mack the Knife gets his cut.
Second, the company boosted its quarterly dividend by 5% to $.89 per share. McDonald’s also announced that it was borrowing close to $10 billion in order to finance further buybacks through 2016. The company has been very good about consistently buying back its own stock and juicing investors’ returns. McDonald’s is also taking advantage of low interest rates before they rise, likely soon.
Third, Easterbrook promised same-store sales growth in all its geographies for the fourth quarter, and the company is targeting revenue growth of 3% to 5% longer-term.
So although McDonald’s did not pursue the REIT spinoff, its other actions indicate that it does actively consider creating shareholder value. And while sales have turned up recently, McDonald’s should continue to focus on its menu, where it’s been challenged for some time, lest investors wind up with a grimace. Management really does not need the distraction created by a spinoff.