McDonald’s: This dividend aristocrat is in trouble

So-called “dividend aristocrats” hold a special place in the hearts (and portfolios) of income investors. These companies represent an elite group — comprising about 10% of the S&P 500 — that have increased their dividends every year for at least 25 years.McDonalds

McDonald’s Corporation (MCD) is one of the most prominent dividend aristocrats. The company also has one of the highest dividend yields of the group: about 3.6% based on the recent stock price. However, this high dividend yield, combined with weak operating results, may endanger its long-term membership in the club.

McDonald’s performed very well during the Great Recession, as consumers traded down to cheaper options for dining out. This allowed the company to maintain a streak of solid earnings growth despite the weak global economy. McDonald’s sales growth and earnings momentum began to slow during 2012, and the weakness continued in 2013. One cause of these financial woes was its U.S. menu, which had become overly complicated, slowing service times and driving some customers away.

Things came to a head in 2014. Operating margin declined significantly last year as beef prices have skyrocketed, and U.S. consumers have increasingly turned toward healthier options. To make matters worse, a variety of food quality scandals in Asia led to a sharp drop in sales and profitability in a region that was previously McDonald’s main source of growth. The net result was that EPS declined 13% to $4.82 in 2014. McDonald’s attributed some of the decline to special items, but any way you slice it, EPS was down year-over-year. Tough market conditions are expected to continue at least through the first half of 2015.