Published Fri, 06 Aug 2021 11:17:39 on Income Investors
MCD Stock Could Be Something Special
Earnings season can be an exciting time for investors because of all the big moves. But for that very reason, trading shares around earnings time can carry a substantial amount of risk. For instance, a company can release a perfectly good earnings report and its stock can still tumble on the news.
McDonald’s Corp (NYSE: MCD) just demonstrated that point again.
On July 28, McDonald’s announced its financial results for the second quarter of 2021. For the quarter, the company generated $5.9 billion of revenue, marking a whopping 57% increase year-over-year. While this strong top-line growth benefited from exchange-rate tailwinds, the company’s constant-currency revenue growth was still a very impressive 49%. (Source: “McDonald’s Reports Second Quarter 2021 Results,” McDonald’s Corp, July 28, 2021.)
Excluding special items, McDonald’s Corp’s adjusted earnings came in at $2.37 per share for the quarter, marking a huge improvement from the $0.66 in the year-ago period.
And considering that analysts expected McDonald’s to report $5.6 billion of revenue and $2.11 per share in adjusted earnings, the company beat Wall Street’s expectations with ease.
But the news didn’t cheer up market participants. On the day the company reported its second-quarter results, McDonald’s stock fell by two percent.
So, where does that leave us?
Well, here at Income Investors, MCD stock has been one of our favorite picks over the years. The reason is simple: no matter what the economy is doing, McDonald’s stock has always paid investors a steadily increasing dividend.
In fact, McDonald’s has been raising its dividend annually since paying its first dividend in 1976. So, for more than four decades, investors have received bigger dividend checks every single year. (Source: “Dividend History,” McDonald’s Corp, last accessed August 4, 2021.)
That means McDonald’s is a Dividend Aristocrat, which is a title given to S&P 500 companies that have at least 25 consecutive years of dividend increases.
MCD stock’s latest dividend hike came on October 7, 2020, when the company’s board of directors announced a 3.2% increase to McDonald’s stock’s quarterly dividend to $1.29 per share. Considering that the restaurant industry was still deep in the doldrums at the time, the payout increase made the company stand out.
The reality is, even though the COVID-19 pandemic brought unprecedented challenges to numerous restaurants, McDonald’s Corp’s business was extremely resilient.
To give you an idea, in full-year 2020, the company’s global comparable sales only declined by 7.7%. Considering that 2020 was a year when restaurants in many regions couldn’t allow dine-in customers for months, the mere 7.7% decrease in McDonald’s Corp’s global comparable sales shows just how special the company is. (Source: “McDonald’s Reports Fourth Quarter and Full Year 2020 Results,” McDonald’s Corp, January 28, 2021.)
As the economy reopens and recovers, McDonald’s is able to get right back on its growth track. In the second quarter of 2021, the company’s global comparable sales increased by 40.5%, reflecting improvements across all segments. The company’s comparable sales rose by 25.9% in the U.S., 75.1% in International Operated Markets, and 32.3% in International Developmental Licensed Markets.
Of course, one of the reasons these sales increases look extraordinary is that, in the year-ago period—the second quarter of 2020—business was sluggish, as there were lockdowns everywhere.
But here’s the thing: even on a two-year basis, McDonald’s Corp’s second-quarter 2021 comparable sales increased by 6.9% globally. The improvement was driven by a 14.9% increase in the U.S., a 2.6% increase in International Operated Markets, and a 0.3% increase in International Developmental Licensed Markets.
In other words, McDonald’s Corp’s business not only recovered, but it’s actually better than before the pandemic.
Moreover, MCD stock’s dividends are as safe as ever. Last year, the company paid $5.04 per share in dividends while earning an adjusted profit of $6.05 per share. In the first six months of this year, McDonald’s paid $2.58 per share in dividends while generating adjusted earnings of $4.29 per share.
Simply put, the company can afford its dividend policy.
Last but certainly not least, McDonald’s Corp’s business has been gaining momentum in the digital channel. In the first six months of 2021, the company’s system-wide digital sales totaled nearly $8.0 billion, representing a 70% increase from a year earlier. (Source: “McDonald’s Corporation (MCD) CEO Chris Kempczinski on Q2 2021 Results – Earnings Call Transcript,” Seeking Alpha, July 28, 2021.)
Moreover, McDonald’s launched a loyalty program in the U.S. in early July 2021. More than 12 million customers have already joined.
Bottom Line on McDonald’s Corp
While McDonald’s stock slipped after the company’s latest earnings report, it’s still trading near its all-time high thanks to a solid bull run earlier this year. As a result, MCD stock is not a high yielder, paying around 2.1% at the time of this writing.
That said, since the company should have no problem continuing its annual dividend-hike track record, investors should be able to earn a higher yield on cost in the years ahead.
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