Is it time to buy the golden arches?



The world knows and loves Mcdonalds (NYSE: MCD), a point marked by the following mind-boggling fact: the worldwide recognition of the iconic McDonald’s Golden Arches was 88%, while the Christian cross, symbol of the world’s greatest religion, had a global recognition rate of 54% .

The unrivaled awareness of the McDonald’s brand, and what it does for profitability, was surely featured in the company’s announcement last month of a 7% increase in its dividend. It was the 45th consecutive annual dividend increase, placing McDonald’s among the dividend aristocrats, which is made up of S&P 500 companies that have increased their payouts for at least 25 consecutive years.

This begs the question: Should dividend growth investors show love to McDonald’s and buy its shares at current prices?

Image source: Getty Images.

Strong operating results

During the first half of this year, McDonald’s delivered strong results to its shareholders.

For starters, McDonald’s revenue in the first half of 2021 jumped 29.9% from the previous year to $ 11.01 billion. And while that revenue was skewed due to the impact on business in the first half of last year due to the disruption related to COVID-19, McDonald’s revenue has also grown at a sustained pace by compared to 2019, increasing 6.9% from pre-COVID revenue of $ 10.30 billion. This suggests that the foundations of McDonald’s, with nearly 40,000 franchised and company-operated restaurants, are stronger than ever.

A key factor that has allowed McDonald’s to emerge from the pandemic stronger than it was heading is the company’s focus on digitally connecting with customers. The McDonald’s app is the most downloaded fast food app in the United States, said Chris Kempczinski, CEO of the company, during the second quarter 2021 earnings call. McDonald’s digital sales increased by 70 % in the second quarter from a year earlier to reach $ 8 billion, which is an indication of the growth potential of the company’s digital sales.

McDonald’s non-GAAP earnings per share (EPS) more than doubled year over year to $ 4.29 in the first half of 2021. But again, that’s not too surprising considering of the pandemic restrictions that McDonald’s faced last year. What is more impressive is that McDonald’s managed to increase its non-GAAP EPS by 16.3% this year compared to the first half of 2019, when it made $ 3.69 per share.

Based on this year’s revenue and BPA gains, McDonald’s has recovered from the headwinds of COVID-19 and growth has rebounded to pre-pandemic rates. This bodes well for the shareholders.

A solid balance sheet

While it is encouraging to see that McDonald’s is posting strong operating results, it is equally important that the fundamentals of the company’s balance sheet are fundamentally strong.

Let’s take a look at McDonald’s earnings before interest and taxes (EBIT) and compare it to McDonald’s interest expense, which is another way of expressing the interest coverage ratio.

As McDonald’s recovered from COVID-19, its interest coverage ratio fell from 4.5 in the first half of last year to 8.3 in the first half of this year.

In other words, McDonald’s EBIT would have to plunge nearly 90%, or interest costs would have to skyrocket (or a combination of the two), before McDonald’s is unable to service its. debt.

Yet even amid COVID lockdowns, McDonald’s EBIT fell only 38.8% in the first half of 2020 compared to the first half of 2019. A 90% drop in EBIT seems rather unlikely.

And since 95% of McDonald’s debt at the end of last year was fixed rate, McDonald’s is largely protected against rising interest rates that push up its interest costs.

Therefore, creditworthiness issues should be far from the mind.

A reasonably priced dividend aristocrat

McDonald’s is a dividend-paying stock that investors shouldn’t overlook.

The nearly half-century history of increasing stock dividends seems to be just the beginning.

In addition to McDonald’s earnings and balance sheet strength, the company’s dividend payout ratio is expected to be in the high range of 50% this year. This leaves McDonald’s with a buffer that should allow it to increase the dividend more or less in line with projected annual profit growth in high single-digit percentages over the next several years.

At around $ 249 a share, McDonald’s isn’t cheap or overpriced. Based on analysts’ consensus estimate of $ 9.47 in non-GAAP EPS, McDonald’s is trading at a forward price-to-earnings (P / E) ratio of 25.3. This is only moderately above the S&P 500 futures P / E ratio of 21.3, which doesn’t seem out of place for a company of this quality.

This is why I would advise dividend growth investors to consider McDonald’s 2.3% dividend yield, if they haven’t already, and buy on any weakness going forward. .

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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