What McDonald’s needs to do to turn around: Experts
Thursday, 21 May 2015 | 6:07 PM ETCNBC.com
McDonald’s needs to forget about big payouts to shareholders and instead focus on investing in its business if it wants to engineer a turnaround, economics professor Josh Mason said Thursday.
The beleaguered fast-food chain has failed to report same-store sales growth since the first quarter of 2014, with U.S. comps lingering in negative territory since the third quarter of 2013.
Mason noted that the company earned about $5.5 billion last year, yet it paid out almost $6.5 billion to shareholders in buybacks.
“If you want to rebuild the business, you have to invest in the business. You’re not going to make the business succeed by disinvesting in it to the tune of $1 billion going out the door to shareholders,” the John Jay College professor said in an interview with “Closing Bell.”
McDonald’s CEO Steve Easterbrook, who took the helm on March 1, announced a turnaround strategy earlier this month that included returning $9 billion to investors.
Shareholder Kevin O’Leary, chairman of the O’Leary Financial Group and “Shark Tank” investor, adamantly disagreed about cutting dividend payouts.
“The reason I own that stock is the fat, succulent dividend payout,” he said. “Don’t even think about dropping that dividend. I would dump that stock so fast and so would a lot of other institutional investors.”
He thinks the company should use its existing budget to get right people and strategies in place. For instance, he’d like to see healthier menu options to attract 18-year-olds.
“They’re going elsewhere to get their fix because they care about what they put in their body,” O’Leary said.
Scott Rothbort, also a shareholder, loves the stock for its dividend but isn’t happy with McDonald’s lack of thinking “outside the box.”
“The big problem I have is that all these changes that are coming to McDonald’s are coming from people who’ve been at company for a long time,” said the LakeView Asset Management president and Seton Hall professor.
“They really need to bring some sort of fresh thinking from outside the company into the fold.”
For him, that means a fresh concept that can compete against the likes of Shake Shack, In-N-Out Burger and other “somewhat higher-end, fresher concepts.”
Rothbort also thinks McDonald’s could make a strategic acquisition, perhaps Krispy Kreme, which he also owns and believes is “ripe” for a takeover.
On Thursday, McDonald’s shareholders approved a proposal to make it easier to nominate directors to the board. Despite opposition from McDonald’s, 61 percent of voting shareholders approved the proxy access bylaw proposal.
The shareholder meeting also drew the attention of protesters who are calling for a wage increase to $15 an hour.
John Jay’s Mason, who is also a fellow at the Roosevelt Institute, thinks the company can benefit from paying its workers more.
“You can pay people higher wages and benefit from that in terms of greater loyalty, reduced turnover. But you have to be committed to people,” he said.
However, Mason said that means McDonald’s has to think beyond the next six months to a year.
“You have to be focused on building this business in an ongoing way if you want to get the rewards from paying people better,” he added.
—CNBC’s Tom DiChristopher and Reuters contributed to this report.