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McDonald’s: Paying Billions (of Borrowed Money) to Stockholders

Photo by Annette Bernhardt via Flickr

Photo by Annette Bernhardt via Flickr

Right there, in the USNWR story “Why McDonald’s stock is blowing the competition away,” was the clearest example yet of how our economy doesn’t work for anybody but the folks at the very, very top.

The company will cut $500 million [in costs] by 2018… it has a goal of having 4,000 stores refranchised in three years… it’s returning $30 billion to shareholders, an increase from $20 billion, through dividends and share buybacks and funded by taking on more debt.

And because of this strategy…

The famed restaurant chain has seen its stock jump by 17 percent since September.

Yes, McDonald’s. The corporation that costs taxpayers an estimated $1.2 billion a year in public assistance, because so many of its workers need government help to make ends meet. One of the employers who provoked the Fight for 15.

Yes, McDonald’s. The corporation whose per-share book value has dropped by 20% over the past decade … while its financial leverage (debt level) has more than doubled. The corporation that just saw its credit rating downgraded again, because Moody’s is concerned about “the company’s recent announcement that it intends to increase its returns to shareholders, the vast majority of which will be funded with additional debt.”

The corporation that has only $5.7 billion in net tangible assets (roughly $6.24 per share).

Yet the stock price hit $114 per share this week.

Because McDonald’s will be distributing an additional $10 billion to shareholders, “the vast majority of which will be funded with additional debt.”

(Even while its employees need $1.2 billion a year in food stamps and other assistance.)

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Image by Rose Lincoln, 1199SEIU

Image by Rose Lincoln, 1199SEIU

McDonald’s long-term debt will, as Moody’s noted, “limit its financial flexibility” for decades to come. Remember, the corporation eventually has to pay all that debt back, plus interest.  So basically, the corporation is using future revenues to pay stockholders now.

Moody’s expects the corporation to borrow even more as it increases its payments to stockholders.  At the same time, McDonald’s is selling off its assets, by “refranchising” 4,000 stores.

And Wall Street rewarded this strategy.  The stock price hit a record high this week… because McDonald’s will be distributing $30 billion, rather than only $20 billion, to shareholders.

And some McDonald’s executives took advantage of that record highChief Administrative Officer Peter Bensen reportedly exercised stock options to buy 15,870 shares – and then sold them the same day – making what I calculate to be a $1.2 million personal profit. Executive Vice President Richard Floersch exercised stock options to buy 23,910 shares, and then sold them – making a profit that I calculate at more than $1.3 million.  Executive Vice President Kevin Ozan also exercised stock options, buying 3,463 shares and then selling them at what I calculate to be almost $268,000 in profit.

And Executive Vice President David Fairhurst sold every share of McDonald’s stock he owned, that day of the record high.

Meanwhile… McDonald’s employees are receiving $1.2 billion in annual government assistance, because their wages are so low they can’t make ends meet.

And the financial press is trumpeting the fact that McDonald’s will be “cutting costs” – usually a euphemism for employee layoffs or wage reductions – by half a billion dollars.

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And no, I’m not the only one who thinks that our economy is being ruined by this fixation on short-term payouts to stockholders.

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Read “What Mitt Romney taught us about America’s Economy” here.

Read my series about Verizon as a case study of what’s wrong with the economy, starting here.

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About Liz Iacobucci

Liz Iacobucci is the former Public Information Officer for the State Employees’ Association of New Hampshire, SEIU Local 1984. Over the past three decades, she has served in government at the federal, state and municipal levels; and she has worked for both Democratic and Republican politicians.
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