The new year is a great time to take stock of your portfolio. Due to COVID-19 variants, inflation fears, and a tech swoon, things are changing rapidly. In this situation, most investors want to retreat to safer investments.
Dividend stocks are great for any investor to do this. They’re usually well-established companies that have been paying out dividends for years and will likely continue doing so in the future. If you fan these kinds of stocks, fast-food chain McDonald’s (MCD) should be right up your alley.
We all have biases. For example, some investors are biased towards stocks that pay dividends. Others may prefer growth companies with rapidly expanding revenue numbers because it’s more likely for them to make money on the stock price going up rather than waiting around, hoping things will get better over time.
It is important to note that there are several different investment strategies; each one has its own set of pros and cons. If you choose an option that doesn’t suit your risk tolerance, time frame, or financial situation, it might be worth considering switching strategies.
Over the last few years, growth stocks have overshadowed dividend stocks and value plays. However, it is best, in my opinion, to dedicate a significant chunk of your portfolio to stable, mature enterprises with the current tenuous financial situation.
McDonald’s has a strong history, excellent fundamentals, and a robust outlook. Its cash-rich, meaning its status as a Dividend Aristocrat is secure. Since the stock suffers from sluggish price momentum at this stage, it is ideal to invest in one of the highest-yielding stocks in the restaurant space.
McDonald’s Emerges as a Post-Pandemic Winner
Over several years, McDonald’s has stitched together an excellent reputation as a proven performer. Rarely a quarter goes by when it misses analyst estimates. Its performance during the pandemic, though, deserves particular praise.
The restaurant industry suffered the most due to COVID-19. However, McDonald’s could survive the pandemic, and it positioned itself for success in the post-pandemic world.
McDonald’s struggled to keep up with demand in the face of a terrifying pandemic, but it persevered and managed a strong financial performance for Q4 2020. MCD announced that 99% of its global same-store sales had returned from Q4 2019 levels – this is tremendous.
According to CEO Chris Kempczinski, this was possible due to the “Accelerating the Arches” strategy. McDonald’s invested heavily to gain an advantage with its core customers. The “three D’s” are digital, drive-thru, and delivery which were crucial because those were the three things that would help them improve how people ordered from home or on-demand rather than ordering off of one menu like before when everything was done face to face.
McDonald’s built on its prior digital innovations to create an experience tailored for those constraints in the face of a pandemic. McDonald’s recent technology innovations, which include developing a mobile application, Mobile Order and Pay, and acquiring Dynamic Yield, have transformed in-store experiences. The new features allow customers to securely pay for their orders and customize them based on what they want.
The success of McDonald’s digital innovations is astounding. In 2020, nearly 20% or $10 billion worth of sales came from channels that use online ordering systems.
Recent Quarterly Results Affirm Splendid Operating Metrics
To better serve its customers, McDonald’s recently made several changes. These include increasing loyalty by creating a rewards program and expanding the company’s drive-thru offerings, and keeping the focus on delivery options.
It was a tumultuous time for the fast-food industry, but McDonald’s managed to stay ahead of their competition and create an easy-to-use app that streamlined ordering. By focusing innovation on three D’s: digital, drive-thru, and delivery, MCD could take advantage of the tremendous change by rolling out new technology quicker than most companies could respond.
Those same beats continue when we see the latest earnings report. In October, the fast-food giant reported third-quarter earnings. The numbers were stellar and handily beat analyst estimates yet again.
McDonald’s fiscal third-quarter net income came in at $2.15 billion, or $2.86 per share, up from $1.76 billion, or $2.35 per share, in the prior-year period. The company reported net sales of $6.2 billion, 14% higher than the year-ago period. Worldwide same-store sales climbed 12.7% from a year ago while increasing 10.2% on a two-year basis.
McDonald’s uses a pricing advisory service to understand how much customers are willing and able to pay for the product. This has helped the company offset increased labor and commodity costs during the past year, despite a roughly 6% hike in menu prices. Separately, international prices also bounced back.
Dividend Investors Need Not Worry about Inflation with McDonald’s
McDonald’s has been on the rise for years now, with its performance improving greatly due to strategic initiatives that were put into place. These work well and give the company a good chance at continued growth moving forward.
McDonald’s has several excellent attributes. For one thing, the company is publicly traded and therefore enjoys a huge scale that allows them to keep prices low while still competing effectively with other fast-food chains. MCD also has an iconic brand that is recognizable all over the world.
However, the biggest reason dividend investors will feel secure with the business model is that it’s recession-resistant. When the economy takes a downturn, consumers will often shift to fast food during recessions. This is because they believe that these restaurants are more affordable and cheaper than sit-down restaurants, which can be quite expensive.
McDonald’s is facing increased costs due to higher labor and food prices, so it has raised its menu prices. Customers seem unbothered by this change. It was reported that foot traffic rose from last year while average check sizes are still high because of the large orders people order when dining at McDonald’s restaurants today.
When times are tough, people will go to the local McDonald’s rather than the French restaurant around the corner. As the go-to option for the budget consumer, the fast-food giant will continue to do well and remain in the conversation of highest-yielding stocks.
Is the Dividend Secure?
One of the main reasons why investors love McDonald’s is the dividend. The fast-food company is known for its strong history of returning capital and increasing dividends. For 45 consecutive years, it has hiked its distribution.
Most recently, McDonald’s upped its dividend by 7%. That brings the fourth quarter dividend payout to above $1 billion. In addition, the company announced that it would resume its share buyback program. The decision to return profits back to shareholders through dividends or purchases of shares is a positive aspect for income investors.
However, a major question investors always ask is whether the dividend is secure. On that end, there is nothing to worry about, as of right now, at least. Due to the franchise model, McDonald’s is always cash-rich.
You might have thought that the best-seller of McDonald’s would be its menu, with all those different options and combinations to consider. In reality, real estate investments bring them billions of dollars every year.
The fast-food giant operates a franchise business model in which the restaurants are run by franchisees who pay for the use of the brand. Some, like McDonald’s, have also invested into owning these outlets outright, earning as both landlord and franchisor. However, only a handful of McDonald’s outlets operate with this model. Instead, it’s all about real estate.
The franchisee is responsible for all the costs of running their restaurant while also paying rent, $45,000 in franchise fees, and a 4% monthly service charge on gross sales.
Trailing 12 months (TTM) cash from operations for McDonald’s stands at $8.47 billion, more than enough to cover the distribution. The interest coverage ratio is 7.82 times. These numbers are very healthy. Consequently, McDonald’s will keep paying and increasing its dividend if it builds on these figures.
Wall Street’s Take
Based on 27 Wall Street analysts providing 12-month price targets for McDonald’s over the past three months, MCD stock earns a Strong Buy consensus rating. 23 Buys and four Hold ratings have been assigned in the past three months.
The average McDonald’s price target is $282.36, representing a respectable 7.9% upside from the last recorded price.
Conclusion
McDonald’s has paid a growing dividend for the past four decades. To stay on top of changing trends in their industry, McDonald’s needed an agile and flexible business model. It was never more evident than last year.
Global economic uncertainty is expected to continue through this year, but McDonald’s has shown a strong ability to bounce back in the past.
Dividend Aristocrats are companies that have a record of paying a healthy, growing dividend during difficult financial situations. These tenacious businesses possess valuable brands, global competitive advantages, and profitable business models with the ability to withstand recessions or pandemic outbreaks. Hence, investors covet them because they are the highest-yielding stocks out there.
McDonald’s personifies all the qualities of an excellent Dividend Aristocrat. If you are looking for a stable, mature enterprise to add to your portfolio, MCD will probably not let you down.
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