McDonald's: Investors (And Employees) Are Lovin' It

By Will Ashworth | October 25, 2009 AAA

If you are married and male, you may have heard the expression "happy wife, happy life." It's gotten me through five years of marriage unscathed, and likely will for many more to come. It's one of life's golden rules.

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One rule that doesn't get a lot of coverage - that's because I'm making it up - is "happy employee equals happy shareholder." It doesn't resonate as much as the rule husbands should live by, but it does point out an obvious reality. The happier employees are, the more productive they will be, which in turn should produce greater profits. So, before you buy your next stock, you might want to look at the 11-K to see just how generous or Scrooge-like its pension plan is. It could be the difference between a ten-bagger and a dud.

Five Top Performing DJ Industrial Stocks
Company 5-Year Stock Return 5-Year Earnings Growth
McDonald\'s (NYSE:MCD) 105.9% 88.2%
IBM (NYSE:IBM) 38.4% 46.3%
Coca-Cola (NYSE:KO) 35.5% 19.8%
Johnson & Johnson (NYSE:JNJ) 5.8% 52.2%
3M (NYSE:MMM) 2.1% 15.7%
DJIA 0.5% N/A

A Whopper of a Retirement Plan
Like with most retirement plans, McDonald's (NYSE:MCD) employees can contribute up to 50% of their pre-tax earnings in their 401(k). Most people don't. Financial planners often suggest employees contribute up to the amount employers will match in their 401(k) and then put the annual maximum in their Roth IRA (currently $5,000) and if they have anything left after paying the bills, to make a further contribution in their 401(k). The important word here is "match." Some companies won't (or don't) match their employee contributions. Not doing so is a morale deflator and to be avoided at all costs. That's not a concern at McDonalds. In fact, their match is overly generous, to the point of obscene.

The retirement savings plan provides those employees with one year of service a 300% matching contribution on the first 1% of earnings and 100% match on the next 4%. So, if you earn $50,000 annually at the Golden Arches and make a 5% or $2,500 contribution to your plan, McDonald's will kick-in $3,500. In addition, at the discretion of management, it will make a further profit sharing contribution on the next 4% in 2008. Overall, that's a 240% match. Not many can claim this privilege. Is it any wonder McDonald's five-year earnings growth and five-year stock returns are highest of the companies in the table above? Not a chance. (In hard times, companies may stop matching your 401(k) contribution, but there are ways to offset the hit, read When Your Employer Cuts Your 401(k) Match.)

A Key Sign
One of the key signs of a caring employee is the Statement of Changes in Net Assets Available for Pension Benefits, presented in every 11-K filed with the SEC. Right there in bold print are the additions to net assets with a separate section for company and participant contributions. You want the company contributions to be higher, as they are at McDonalds. In 2008, McDonald's made $74.1 million in contributions to the 401(k) and employees $48.8 million. In the future, that's the first place you should go to get an idea of a company's generosity. It doesn't mean all companies that contribute more than employees are enlightened, but it does suggest they might be.

Company Stock Ownership
Another interesting detail of the McDonald's 401(k) is that it limits contributions for buying company stock to 20%. Therefore, in the example above, the employee making an annual contribution of $2,500 with company additions of $3,500 can invest no more than $1,200 in McDonald's stock. The rest must go in various funds made available by the company. It's curious what some of the other companies from the list above allow.

IBM (NYSE:IBM), for the most part, has a good plan offering employees a very competitive match along with a large number of investment options, including the IBM Stock Fund, which invests in its own shares. Unfortunately, there is no maximum like McDonalds. That's a mistake. While it's good to have employees buying your stock, the dotcom bubble is a reminder how a belief in your company can turn into a financial nightmare. There needs to be a cap for the protection of employees. Besides, most of the mutual funds available to employees already invest in Big Blue, so a cap shouldn't be a concern.

Coke (NYSE:KO) also has a reasonable plan, matching the first 3% of an employee's compensation dollar-for-dollar. Unfortunately, there is no cap, and worse: all company contributions initially go towards buying company stock with employees able to convert the shares later. The problem is they probably never do. Coke stock accounts for 51.6% of the plans assets. It needs to be lower. (No more excuses. Make sure you are financially secure and independent for your golden years, read Compound Your Way to Retirement.)

The Bottom Line
Treating employees well isn't some fluffy human resources concept. It is the first rule of business. Shareholders can't benefit unless employees are genuinely happy to go to work. Sure, recent earnings reports have surprised to the upside, proving cost-cutting does work. Long-term, however, if you can't keep your employees happy, you won't grow the top line and that's where the real money comes from.

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