The first seven weeks of this year marked the return of volatility to the stock market. One way to navigate market volatility is to buy S&P500 stocks that have increased their dividends for at least 25 consecutive years, called Dividend Aristocrats.
The Fast Food Dividend Aristocrat McDonald’s (MCD -0.13% ) has held up better than the S&P 500 since the start of the year. McDonald’s stock fell 6.5% while the S&P 500 fell 8.4% during this period. Let’s look at four reasons why investors should consider the stock for their portfolio.
1. An impressive pandemic recovery
McDonald’s recorded robust revenue and profit growth in 2021. The company generated $23.22 billion in revenue, representing a growth rate of 20.9% over the previous year. McDonald’s sales even increased by 10.2% compared to the pre-pandemic year 2019.
On the earnings front, non-GAAP diluted earnings per share (EPS) (adjusted) jumped 53.4% year-over-year to $9.28 last year. This is the result of the company’s higher revenue base and a 790 basis point increase in its net margin to 32.5%. Even compared to the pre-pandemic year of 2019, McDonald’s adjusted diluted EPS increased by 18.4%.
What led to these tremendous results? McDonald’s systemwide sales (which includes both 7% of corporate-owned locations and 93% of franchise-owned McDonald’s locations) hit a record $112 billion last year. Despite disruptions related to the COVID-19 pandemic that continued to some degree into 2021, McDonald’s opened more than 650 new restaurants during the year, according to CEO Chris Kempczinski’s remarks during the recent earnings call. of the company.
This brought the company’s global restaurant count to an astounding number of over 40,000 at the start of this year. Thus, more stores contributed to the increase in sales across the McDonald’s system.
2. A popular loyalty program
McDonald’s and its franchisees have also become even more efficient in running existing stores. The company’s global comparable sales were up 17% from a year ago and 8% from 2019. McDonald’s loyalty program, known as MyMcDonald’s, was a major driver. Since launching the program in the United States last July, the MyMcDonald’s program has grown to 30 million registered members and 21 million active members earning rewards.
The resounding success of MyMcDonald’s is significant because it has led to increased customer engagement and customer retention. This has been demonstrated by a 10% increase in digital customer frequency since the US launch. With rollouts planned for the first half of this year in the UK and Australia, McDonald’s customer engagement and sales are expected to continue to grow.
3. The dividend is secure
McDonald’s also looks set to extend its 46-year streak of dividend growth in the years to come. McDonald’s has both the profitability and the free cash flow (FCF) to maintain its reputation as a top-notch dividend producer.
This is supported by McDonald’s adjusted diluted EPS payout ratio of 56.6% last year. Since independent business owners pay the capital required to open a McDonald’s restaurant and become a franchisee, McDonald’s franchise business model is not too capital intensive. The company must have sufficient capital to continue to develop its activity.
McDonald’s FCF payout ratio was even lower at 55.6% last year, providing plenty of capital to open new company-owned restaurants, pay down debt and increase the dividend .
In light of McDonald’s growth forecasts, I believe the stock should be able to increase its dividend to high single digits in the medium term. Coupled with a market-beating 2.2% dividend yield, this offers dividend-growing investors a nice combination of yield and growth prospects.
4. The evaluation is not stretched
The final reason to consider buying McDonald’s stock is that the valuation is reasonable for its quality relative to the restaurant industry. McDonald’s forward price-to-earnings ratio of 22.8 is slightly below the restaurant industry average of 23.8.
Additionally, McDonald’s respectable earnings growth looks set to continue. Analysts expect McDonald’s non-GAAP diluted EPS to grow at a rate of 13% per year over the next five years. Given that this rate is about the same as the industry average of 14.7%, the stock’s valuation seems fair.
I believe that McDonald’s strong growth will continue in the years to come.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.