MCD Stock: Time to Bail on McDonald’s Corporation?
McDonald’s Stock: Not Exactly a Market Favorite
Is it possible for a stock to decline after the company beats both top- and bottom-line expectations? Turns out the answer is “yes,” with McDonald’s Corporation (NYSE:MCD) stock being the latest example.
McDonald’s Corporation released its fourth-quarter earnings before the market opened on Monday. Both top- and bottom-line numbers beat expectations, but MCD stock still slipped nearly one percent on the news.
Look at bit further back and you’d see that McDonald’s stock hasn’t really been a hot commodity. Over the past 12 months—a period where all three major stock market indices soared past their all-time highs—MCD stock returned just 1.8%. Does this mean it’s time to bail on McDonald’s stock?
Not so fast.
Growing Same-Store Sales
Started as a single barbecue restaurant in 1940, McDonald’s has grown to become one of the largest fast food restaurant chains in the world. Over the years, competition in the restaurant business has intensified, and analysts expected the decades-old company to slow down. However, despite its age, McDonald’s is still showing impressive growth in a key metric.
In the fourth quarter of 2016, McDonald’s global comparable store sales surged 2.7%, smashing Wall Street’s expectation of a 1.3% increase. In full year 2016, global same-store sales rose an even more impressive 3.8%. (Source: “McDonalds’ Delivers Fourth Quarter And Full Year 2016 Results,” McDonald’s Corporation, January 23, 2016.)
This is good news for MCD stock investors. With consumers embracing the health and wellness trend, many have thought that McDonald’s restaurants wouldn’t be as popular as before. But with rising same-store sales, that concern is now mitigated.
Financials Not as Bad as Wall Street Thinks
As I mentioned, the increasingly competitive environment and the health and wellness trend have made Wall Street cautious about MCD stock. One consequence is that expectations weren’t very high, which means the company might be able to beat them. And it just did.
In the fourth quarter of 2016, McDonald’s generated $6.03 billion of revenue, beating Wall Street’s expectations of $6.0 billion. Adjusted earnings came in at $1.44 per share, also topping analysts’ estimates of $1.41 per share. (Source: Ibid.)
Returning Value to MCD Stock Investors
Of course, surpassing expectations might not be enough to cheer up stock market investors. In the past four quarters, McDonald’s beat Wall Street’s EPS estimates every single time, but as we have seen, that did not really do much to boost the appeal of MCD stock. However, for income investors, there is a way to collect returns without the stock market’s approval: dividends.
McDonald’s is deeply entrenched in the global restaurant business. It has over 36,000 locations in more than 100 countries. Its established position in a relatively slow-changing industry means it can return some value to MCD stock investors.
Since paying its first dividend in 1976, McDonald’s stock has raised its payout every single year. That’s four decades of consecutive dividend hikes!
The latest dividend increase came last September, when the company’s board of directors declared a quarterly cash dividend of $0.94 per share, representing a six-percent increase over its previous payout. At today’s price, MCD stock has an annual dividend yield of 3.11%. (Source: “McDonald’s Raises Quarterly Cash Dividend By 6%,” McDonald’s Corporation, September 29, 2017.)
Other than dividends, the company also returns value to shareholders by buying back its shares. In full-year 2016, McDonald’s returned a total of $14.2 billion to investors through share repurchases and dividends. It has just completed its target return of $30.0 billion for the three-year period ending 2016.
The Bottom Line on McDonald’s Stock
At the end of the day, McDonald’s still has its appeal. No matter where you are, be it New York, Hong Kong, or Cape Town, you know exactly what you are getting when you see the company’s iconic “Golden Arches.” With growing same-store sales and generous dividends, MCD stock still deserves the attention of income investors.