McDonald's stock Archives

New on my buy list for June 2024 is McDonald’s (MCD). It matches my investment strategy perfectly, including a strong dividend triangle showing robust growth trends for revenue, earnings, and dividends. I see MCD as a core holding. Missed our stock pick for May? Read all about it here.

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McDonald’s Business Model

McDonald’s is a food service retailer with over 40,000 locations in over 100 countries. The Company’s segment includes United States, International Operated Markets, and International Developmental Licensed Markets & Corporate.

The International Operated Markets segment operates and franchises restaurants, in markets including Australia, Canada, France, Germany, Italy, Poland, Spain, and the United Kingdom. This segment is over 89% franchised.

The International Developmental Licensed Markets & Corporate segment consists of developmental licensee and affiliate markets in the McDonald’s system. This segment is about 98% franchised. Its menu features hamburgers and cheeseburgers, the Big Mac, the Quarter Pounder with Cheese, the Filet-O-Fish, and several chicken sandwiches like the McChicken, McCrispy and McSpicy.

Approximately 95% of McDonald’s restaurants worldwide are owned and operated by independent local business owners.

MCD Investment Thesis

After seeking ways to generate additional growth for many years, and failing on many attempts, MCD’s CEO finally found a way to succeed. Through a major re-franchising of over 4,000 locations, MCD was able to improve its business model. It increased its earnings, reduced volatility, and won the market’s favor once again.

MCD enjoys strong brand recognition and is the world’s largest fast-food retailer. MCD is attentive to its customers and has made many changes to its menu over the years, adding all-day breakfast and healthier options. Their loyalty program has reached over 50 million customers in top operating markets. The company opened 2000 new restaurants in 2023.

Vintage black and white photo of a McDonald's restaurant, circa the 1950s. — Resilient and adaptable to change over the years

McDonald’s puts a lot of effort into its “Accelerating the Arches 2.0” plan built around four D’s: delivery, digital, drive-through, and development. With more drive-throughs and remodeled restaurants, McDonald’s is well-positioned to take advantage of evolving digital ordering habits. Finally, recent initiatives in mobile ordering and delivery could bode well for continued growth in digital traction, along with consumers trading down from more costly alternatives.

For 2024, MCD expects to open about 2,100 restaurants globally, resulting in a 1,600 net restaurant growth for the year. MCD also expects a free cash flow conversion rate of around 90%. Operating margin is expected to land in the mid-to-high 40% range.

McDonald's dividend triangle. Solid growth trends for revenue, earnings, and dividends. — MCD Dividend triangle – Good growth trends for revenue, earnings, and dividends.

MCD Last Quarter and Recent Activities

McDonald’s reported an “okay” first quarter 2024 with revenue up 5%, but EPS only up by 3%. Revenue growth was driven by solid performance across the U.S. and International Operated Markets (IOM) segments, despite challenging macroeconomic conditions. The continued impact of the war in the Middle East more than offset positive comparable sales in Japan, Latin America, and Europe. Comparable sales in the U.S., up 2.5%, benefited from average check growth driven by strategic menu price increases. The company expects continued moderation in top-line growth due to consumer pressures and a challenging economic landscape.

Potential Risks for McDonald’s

The reduced purchasing power and potential loss of disposable income from customers could bring some choppy quarters. Franchisees are seeking support and MCD will require additional liquidity to provide for its restaurants as the economy stabilizes. Some franchisees may not survive further economic slowdowns, and MCD will continue to face labor shortages and wage inflation, especially in the US.

All fast-food chains compete for the same customers’ dollars. MCD’s debt has decreased but is still significant at $39B with more investments coming. While we await interest cuts, MCD should make a concerted effort to pay down debts.

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MCD Dividend Growth Perspective

MCD has increased its dividend every year since 1977. The company has grown both its cash flow from operations and free cash flow over the past 10 years. Through its re-franchising process, the restaurant chain improved its earnings and shows a payout ratio that is well under control.

The company enjoys financial flexibility, but the dividend growth policy could slow down as the company’s payout ratio continues to rise. In 2020 the dividend increase was only 3%, followed by a more generous 6.98% in 2021. Thanks to stronger numbers, MCD increased its payout by 10% in 2022 and by another 10% in 2023!

Final Thoughts on McDonald’s

There are many compelling reasons to see McDonald’s (MCD) as a good investment. Its global brand recognition and presence in over 100 countries, ensures a steady revenue stream. Its business model, combining company-owned and franchised restaurants, provides stability and growth potential, and transfers some of the risk to franchisees.

McDonald’s resilience through economic cycles, adaptation to consumer preferences, and embrace of technology, such as digital ordering and delivery services, enhance its appeal. Additionally, its strong dividend history and commitment to returning value to shareholders make it an attractive choice for long-term investors seeking both growth and income.

McDonald’s (MCD)

I’m adding McDonald’s to my list for 2024. We increased MCD’s ratings on DSR in 2023 because its dividend triangle continues to strengthen; revenue and earnings increasing steadily again and dividend growth continuing.

McDonald’s Dividend Triangle

McDonald’s plans a record pace of expansion in the coming year and is targeting expansion from 40,000 to 50,000 restaurants by the end of 2027. This will be the fastest growth plan in McDonald’s history.

MCD enjoys strong brand recognition and benefits from its recession-resistant business model to fuel more sales even during tough economic times. The world’s largest fast-food retailer has proven attentive to its customers and has introduced many changes to its menu over the years, such as an all-day breakfast and healthier options including many chicken items. Notably, MCD wants to expand McCrispy into wraps and tenders.

MCD has increased its dividend yearly since 1977. MCD grew both its cash flow from operations and free cash flow over the past 10 years. Through its re-franchising process, the restaurant chain improved its earnings and shows a payout ratio that is well under control. The company enjoys financial flexibility, but the dividend growth policy could slow down as the company’s payout ratio continues to rise. The dividend increase was only 3% and was then a more generous 6.98% in 2021. Thanks to stronger numbers, MCD increased its payout by 10% in 2022 and by another 10% in 2023!

See more of our U.S. stock selections by sector, get our Top Stocks for 2024!

Costco (COST)

With Costco, I’m going for strength and growth potential. While there are opportunities in the chocolate, snacks and soft drinks industries, COST remains a solid pick for years to come. I added COST to my retirement account (not disclosed at DSR) in 2023 after listening to the Acquired Podcast on the company. COST has been showing a perfect dividend triangle for 10 years now. I had the numbers, but I lacked the narrative. How can Costco continue to grow from there? I got my answer in the podcast; it’s easier to find a good story about a stock, than to find great numbers!

Costco's dividend triangle, steady growth across the board

Costco’s Dividend Triangle – Near Perfection!

COST is the definition of “Heads, I win; tails, I don’t lose much!”. COST shows an impressive growth trajectory and is now expanding its business outside of North America. It shows an impressive membership renewal rate that is above 90%. It targets consumers who can afford to buy in bulk, i.e. wealthier than the average. In case of a recession, these consumers will be less affected by the economy and likely will continue to shop at Costco.

COST has a low yield (~0.64%), but its growth rate is phenomenal. Over the past 5 years, it raised its dividend by 75%! In the same period, it also issued 2 special dividends. COST’s membership model has helped the company generate lots of cash. In other words, expect strong high single-digit dividend growth in the coming years. With its very strong dividend triangle it’s a keeper, but if you want to invest, be prepared to pay a premium. COST isn’t cheap. In fact, an investment in Costco is an investment in a company that will continue to grow. An investor must be ready to pay a premium for it.

See more of our U.S. stock selections by sector, get our Top Stocks for 2024!

UnitedHealth Group (UNH)

Last but not least is this all-star dividend grower with an almost perfect dividend triangle. United Healthcare Group is a perfect example of a low-yield, high dividend growth stocks.

UnitedHealth Group's near perfect dividend triangle showing steady growth trend for revenue, EPS and dividend amount over 10 years

UnitedHealth Group Dividend Triangle – Doesn’t get much better than this

United UNH is the largest private health insurance provider in the U.S. What strikes us when we analyze UNH is its ability to constantly be one step ahead of peers by pre-emptively adapting its business model to industry and political happenings. They offer medical insurance, pharmacy benefits, and healthcare services as a one-stop shop. This helps their customers manage their healthcare costs more effectively than with most alternatives. This is how revenue and EPS increase year after year without much fluctuation. The stock trades at a forward PE ratio of 19.75 while the 5-year average sits at 22.81.

Regulatory risk will always exist; politicians could aim for a healthcare revamp where the government would offer public healthcare, and possibly drive out private healthcare system players. However, the chances of this happening are low, and it would likely take many years and decades to implement. There might be some potential headwinds down the line, but we trust that UNH will, as it has before, find ways to adapt its business. An increase in unemployment could also hurt UNH’s business.

It acquires Change Healthcare for $8B in 2022. We believe there is more growth to come from UNH but are mindful of its valuation, as it may be on the higher end.

McDonald’s (MCD): In Top Five of my Buy List for June 2024