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A new sign of normalcy: McDonald’s resumes share buybacks

The company said it plans to resume buying back shares, which it had abandoned during the pandemic.
Photo by Jonathan Maze

Here’s another sign that things have returned to normal at the nation’s fast-food chains: McDonald’s will resume buying back shares.

The Chicago-based burger giant on Thursday said that it would resume buying back shares—it also increased its quarterly cash dividend by 7% to $1.38 per share.

McDonald’s is hardly alone in resuming share buybacks. Numerous restaurant companies have done the same thing in recent months, including Burger King owner Restaurant Brands International and Jack in the Box, among many others.

Their return is a clear sign that companies are feeling better about their business prospects.

Overall, U.S. publicly traded companies bought $198.8 billion worth of shares in the second quarter, up 11.6% from the first quarter and up 124% from the same period a year ago, according to the S&P Dow Jones Indices. Share buybacks were expected to remain elevated for the rest of the year.

Companies buy back shares and pay out dividends when they have extra cash and are feeling confident in their business prospects. Such programs became less common last year when the pandemic hit and the economy suffered with it.

McDonald’s suspended its $15 billion share buyback program in March of last year, when it appeared that business would be suppressed for an uncertain period of time. In short, McDonald’s along with many other restaurant chains opted to hoard cash as part of a survival strategy. It also enabled the company to give operators royalty and other breaks to ensure they would remain open.

But sales have returned at the burger giant—now well over 2019 levels. Earnings have improved more than expected, too. McDonald’s earnings per share was $2.37 in the second quarter, for instance, 12% higher than expected, according to data from the financial services site Sentieo.

As such, the company has opted to start buying back shares again.

To be sure, share buyback programs are hardly without their critics. By buying back shares, companies spend more assuaging wealthy investors than spending on things like research and development, expansion or other business investments, or simply paying higher wages.  

The Harvard Business Review, for instance, said that companies on the S&P 500 spent more than half of their net income on share buybacks over the past decade.

Share buybacks generally boost a company’s share price by restricting the stock availability and spreading earnings across fewer shares. They can be effective when a company’s stock is performing more poorly than a company expects and executives want to give it a shot in the arm. Yet that’s usually not the case with such programs, and indeed McDonald’s stock is trading at its all-time high.

Unsurprisingly, McDonald’s biggest critics, the union-backed Fight for $15 group, pounced on the company’s announcement.

“Even while my coworkers and I continue to risk our lives day after day to serve fries and Big Macs in the middle of a pandemic, McDonald’s has decided to resume business as usual by playing games with the stock market to fill the pockets of its executives and shareholders,” Juanita Camerena, a San Francisco McDonald’s worker and a leader of the Fight for $15 movement, said in a statement the group sent out on Friday.

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