McDonald’s: Debt Funded Payout-Ratio And Reignited Restaurant Growth


  • MCD announced new long-term targets at the end of 2023, including restaurant expansion of 4-5% annually going forward.
  • Traffic development is weak, while MCD increased prices faster than peers over the past decade. MCD expects comparable sales growth in line with GDP growth going forward.
  • MCD can payout 125% of Free Cash Flow without weakening the balance sheet, resulting in enhanced shareholder returns.
  • My DCF valuation leaves me to assume that MCD is very close to fairly valued, with a small margin of safety.
  • The major risk is that we do not know if MCD will be able to achieve the optimistic restaurant growth targets.

Sommer Innenstadt Historisches Viertel Luxus Einkaufsstraße McDonald"s Restaurant Moderne und traditionelle Architektur Reiseziele Grüner Korridor Freie Passage Fußgängerzone

Anna Linda Knoll/iStock Editorial via Getty Images


In my earlier articles on Starbucks (NASDAQ:SBUX), I commented about one of SBUX’s major peers in the restaurant industry, McDonald’s (NYSE:MCD). In my latest article on SBUX, I

Year 2021 2022 2023
Systemwide sales 112,500 118,200 129,500
– company-operated sales -9,788 -8,748 -9,742
= Franchisee sales (A) 102,712 109,452 119,758
Reported royalty revenue (B) 4,645 5,006 5,531
(B) divided by (A) = Royalty fee % 4.52% 4.57% 4.62%

Year 2021 2022 2023
Franchisee sales 102,712 109,452 119,758
x (55/95) = Conventional License sales (A) 59,465 63,367 69,334
Reported rent revenue 8,381 9,046 9,840
(B) divided by (A) = Rent fee 14.1% 14.3% 14.2%

Year 2021 2022 2023
Company-operated sales 9,788 8,748 9,742
Company-operated operating earnings 1,740 1,368 1,517
– New Royalty Fee (5% of sales) -489.4 -437.4 -487.1
Franchisee operating earnings (Estimate) 1,250.6 930.6 1,029.9
Franchisee operating margin 12.8% 10.6% 10.6%

Year 2014 2015 2016 2017 2018 2019
Comparable Guest Count Growth -3.6% -2.3% -0.3% 1.9% 0.2% 1.0%

Year 2014 2015 2016 2017 2018 2019 2022 2023
Average Check Growth % 2.6% 3.8% 4.1% 3.4% 4.3% 4.9% 5.9% 6.0%

Free Cash Flow FY14-FY23 $49,950 million
Total Payout FY14-FY23 $75,415 million
Total Payout Ratio 151%

Free Cash Flow FY17-FY23 $37,193 million
Total Payout FY17-FY23 $46,647 million
Total Payout Ratio 125%

Global comparable sales +1.9%
Systemwide sales +3%
Operating Earnings +8%
Earnings per share +9%
Restaurant growth +3.66%

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