- Chicago-based quick-service restaurant (QSR) chain McDonald's Corp. currently generates robust free operating cash flow in the $5 billion to $6 billion range annually, by our estimates, and we expect further strengthening to over $7 billion annually in the coming two years as menu and technology initiatives grow market share globally.
- As a result, we revised our liquidity assessment to strong from adequate, incorporating availability under McDonald's $3.5 billion line of credit.
- We affirmed all of our ratings, including the 'BBB+' issuer credit rating, on McDonald's Corp.
- The stable outlook reflects our expectation that the company will continue to execute its operational plans to renovate its U.S.-based stores and focus on delivery and moderate technology investments over the coming year.
NEW YORK (S&P Global Ratings) April 5, 2019--S&P Global Ratings today took the rating actions listed above. Our ratings on McDonald's Corp. reflects its leading global position in the QSR segment and our expectation that the company's operating performance will continue to improve in the next 12 month. Specifically, we expect benefits from store image remodeling and a focus on improved ingredients to drive positive traffic growth in the U.S. We also believe McDonald's will use its solid free operating cash flow to maintain stable credit metrics in line with recent levels, including lease-adjusted leverage close to the mid-3x range and funds from operations (FFO) to debt in the 20% area. We do not expect material changes to capital allocation plans through 2019, which include significant share repurchase activity. S&P Global Ratings' stable outlook on McDonald's Corp. reflects our expectation that the company's recent turnaround efforts will continue to drive positive U.S. guest counts and strong global comparable sales in the coming year. We also think results will benefit from cost reductions, and believe McDonald's will continue to prioritize allocating capital to shareholders, even as it executes on new strategies to improve operations in key markets. We would lower the rating if McDonald's increases its return of capital to shareholders materially beyond its currently planned levels while experiencing limited improvements in traffic during the next year or two. One scenario leading to a lower rating would be weak comparable sales in the U.S. and an incremental debt of more than $3 billion for shareholder returns above our expectations. This scenario would push leverage up toward 4x and lead us to remove the positive comparable rating analysis modifier, given a more aggressive financial policy and less cash available for debt repayment and investment in the business as compared to peers. Longer term, a higher rating is unlikely even if the company's operating momentum continues to gain traction with consumers, which we expect. This is because we believe the company will remain focused on returning capital to shareholders in the coming two years.
