Last month, when McDonald’s (NYSE:MCD) reported, Q4 2018 earnings, they showed 4.4% growth in overall same-store sales, beating the 4% average of analysts’ estimates. Achieved during a tough period for fast food outlets, the results provide reassuring evidence that the global restaurant giant is firmly in control of its turnaround plans.
The current environment for fast-food restaurants is challenging; the industry is seeing threats to growth from changing consumer preferences, as customers increasingly seek healthier options and cut back on junk food consumption, while technology disruptors that make home deliveries more affordable and have become a first choice for many millennials, are reducing store traffic.
In addition, the restaurant business is a constant work-in-progress. Investors hungry for some growth and steadily increasing dividend income have to be very selective when buying the stocks of companies that run large global food chains. McDonald's is doing many things right to keep its growth momentum strong when compared to competitors.
The company's successful strategy is also rewarding loyal investors, who have seen the stock rise 10% in the past year. Shares were up 2.3% yesterday to $179.97 at market close, and have 10% upside potential according to analyst consensus forecasts for the next 12 months.
McDonald’s Is in Control of its Destiny
McDonald’s has beaten earnings estimates in all but one quarter since 2015. Comparable sales, or sales at stores open for at least 13 months, in the U.S. rose 2.3% in the fourth quarter. Global growth was much stronger. Comparable sales at restaurants in top global jurisdictions, including the U.K., Europe and Australia were up 5.2% in the last quarter.
This winning streak is impressive, especially compared with other large global fast-food operators. The coffee giant Starbucks (NASDAQ:SBUX), for example, is struggling to attract more customers to its massive network of coffee shops and is betting big on China, where competition from smaller players is escalating.
For McDonald’s, one concern keeping some investors on the sideline is whether Big Mac will be able to maintain this winning streak in the face of some powerful headwinds. Economic growth is slowing in China and Europe, while escalating wage costs and heightened competition in the U.S. have the potential to hurt McDonald’s future growth.
But in our view, the owner of Golden Arches is still one of the best defensive bets to play the economic uncertainty.
As part of CEO Steve Easterbrook's strategy, McDonald’s has been recovering market share through a variety of initiatives including all day breakfast offerings, menu innovation such as healthier food choices, as well as higher quality ingredients and improvements to the overall restaurant experience.
Remodelling its stores has been a big part of Easterbrook's push to bring in more customers. The $6 billion plan to overhaul most of its 14,000 U.S. restaurants has been designed to give visitors a fresh and modern look with digital kiosks, new furniture and decor.
These efforts have no doubt kept McDonald’s ahead of the game and fueled gains in its shares, which have consistently beaten the broader market over the past five years. The stock has delivered 86% returns, including dividends, during that period when compared with 50% gains from S&P 500 Index.
McDonald’s is proving a good bet for long-term income investors who want to benefit from the burger chain’s growing cash flows. Last September, the company hiked its dividend 15%, raising it to $1.16 per share each quarter, up from $1.01. Its payout ratio is a very healthy 39.4. This was the 42nd year in which McDonald’s has had an annual dividend increase.
Bottom Line
We believe McDonald’s growth momentum will help the company to continue with its generous payout policy. At its current price, that translates to an annual dividend yield of 2.64%. If you’re looking to add a quality income stock to your portfolio, the timing looks right to consider MCD.