Investors might not have heard much about McDonald’s (MCD:NYSE) of late. It’s not as exciting as younger, faster-growing fast-food chains like Shake Shack (SHAK:NYSE), Tortilla Mexican Grill (MEX:AIM) or even Chipotle (CMG:NYSE). But McDonald’s shares continue to consistently outpace the market while the company remains a reliable dividend grower.

In investment markets stressed by a biting cost-of-living crunch, there are few investments that provide investors with the sanctuary of reliability and safety offered by McDonald’s.

LURING CUSTOMERS

The pandemic saw thousands of casual dining restaurants close, many never to reopen, and this created a reopening opportunity for McDonald’s. With its powerful and pervasive global brand and infrastructure, McDonald’s offers the cheap and convenient outlets to fill any gaps in the market as restaurant sales returned to pre-pandemic levels.

It has more than 38,000 outlets in 120 countries worldwide (less Russian closures) and it is said in some marketing circles that the chain’s ‘Golden Arches’ are more widely recognised than the Christian cross.

Last month, Kantar ranked McDonald’s as the sixth most valuable corporate brand in the world, worth $196 billion, and top of the pile for non-technology businesses. McDonald’s owns and runs around 2,600 outlets itself. The remainder are franchises, where the company licences its operating model to franchisees in a profit share arrangement.

In recent years, restaurants have been refitted, brightened up and dragged into the 21st Century, with free customer wi-fi, phone charging points, self-order kiosks, and curb-side pick-up through mobile app ordering. These are no longer the drab outlets they once were.

McDonald’s has been providing home delivery in many markets for some time through deals with Uber Eats and Just Eat Takeaway (JET) in the UK.

It has also launched a broader range of meat-free products, which should bolster its appeal with healthier-eating and ecology-mindful millennials, one of the chain’s longer-run challenges, according to critics.

The business is also embracing technology and data analytics to improve efficiency and customer experience while lowering running costs using automation and robotics.

DISCRETIONARY THAT BEHAVES LIKE A STAPLE

McDonald’s will report second-quarter earnings on 28 July. These are expected to show rough 8% growth on Q1 at $2.46 on low single-digit revenue expansion – decent given the slowing global economy. When it comes to consistency, this is a consumer discretionary stock that behaves like a consumer staple.

Despite the ugly performance of global stock markets in 2022, McDonald’s share price has toughed it out losing less than 6% year-to-date, putting it close to the top quintile of S&P 500 performers this year. The S&P 500 is down 20%.

Now we are in the second half of 2022, analysts and investors will start to look beyond the current fiscal year (to 31 December) to 2023, when growth in revenues, profits and earnings are expected to pick-up.

McDonald’s is forecast to see mid-to-high single-digit growth on all three metrics next year, growth that we believe will become increasingly attractive to investors looking for stability from their portfolios, yet the stock trades at a more than palatable 24.5 times forward earnings, according to Koyfin data, well below industry peer Chipotle’s forward PE of 37 (Shake Shank remains unprofitable, so there’s no PE to compare).

A DIVIDEND ARISTOCRAT

McDonald’s remains a ‘Dividend Aristocrat’ which means more than 20 years of rising payouts. The company paid out $5.25 per share in 2021, up from $5.04 in 2020.

It’s the 45th straight year the company has raised its dividend payout and the company is expected to pay $5.58 this year, implying a 2.2% yield at the current share price.

With one of the larger exposures to a Russian embargo, it’s hardly surprising that the share price has seen some volatility during 2022. McDonald’s anticipates a hit of between $1.2 billion and $1.4 billion after shutting up shop in Russia, although the company has now sold its Russian assets to a Siberian franchisee, providing a platform for recovery. The stock has already bounced nearly 15% since March lows.

Measured versus peers, McDonald’s has industry-leading gross margins of 55%, giving it far better control over input costs, and operating profit margins in excess of 40%, more than four times the industry average, according to Investing.com data. 

McDonald’s stock isn’t necessarily going to leap in the short-term but it could make reliable and attractive gains through the rest of 2022 and beyond regardless of whether we plunge into a recession, in our view. The rock-solid dividends will help build long-run wealth for longer-term investors.

‹ Previous2022-07-14Next ›